Why Oil Prices Could Rise to $100 Again

0:00Welcome to Thoughts on the Market. I'm Martin Ratz, Morgan Stanley's global commodity strategist. Today, why do oil market is tightening? And why we now see Brent reaching $100 per barrel later this year. It's Thursday, September 3rd, at 3PM in London. It has been an extraordinary summer for oil. Brent, the global benchmark price for crude oil and the reference point for most of the world's oil trade, and above $110 per barrel in mid-May, fell to 71 by early June, climbed back above 103 weeks later, and then dropped again to around $79 per barrel. More recently, the price has moved higher again. But the question now is whether that is just another temporary swing, or whether there is a sign that the underlying market has changed. We think it's changed. Supply tightening, inventors are falling, and some of the buffers that helped absorb earlier disruptions, are fading. The clearest evidence is in inventories.

1:00Crude oil sitting on the water fell from nearly 1.3 billion barrels in mid-July to 1.1 billion barrels recently. That was a decline of about 190 million barrels. During one four week stretch, oil and water fell at the unusually high rate of 5.3 million barrels a day, the fastest four week decline since this data series began about eight years ago. Usually, when there is such a large amount of crude oil that is brought on land, it drives up unsure oil inventories. However, not on this occasion, on a global basis, unsure crude oil inventors have fallen by another 38 million barrels over the same period. That means that those offshore barrels arriving were being used straight away rather than put into land-based storage. The biggest supply issue is still the Middle East. Crude flows from the straight of a moose briefly recovered to about 15 million barrels a day after the June memorandum of understanding.

2:00That was close to the pre-conflict level. More recently, however, they have been running again around about 70 million barrels a day. Now, Red Sea exports have fallen sharply from about 4.5 million barrels per day in March and April to around about 1.5 million barrels a day at the moment. Therefore, total regional exports are still up from the lows in March and April, but they are sharply down from that late June peak. Another source of support is fading, strategic petroleum reserves. Globally, those releases added around 2.5 million barrels a day to supply in March and April, but that has fallen sharply and we do not anticipate material further releases from global SBRs after September. Then China is important too. Its seaborn crude oil imports are normally around 10 to 11 million barrels a day, but briefly fell as low as 5 million barrels a day, leaving more oil available elsewhere. China's buying activity still appears low, but at a minimum it has stabilized and there are tentative signs of an increase.

3:04If Chinese imports have stopped falling and possibly go into reverse, they can no longer free up additional barrels for buyers elsewhere, making the global oil market tighter. So why hasn't crude become even more constrained? It's because of refineries. Global refinery outages are running 5 to 6 million barrels a day above normal. Although supply of crude oil is constrained, this means that demand for crude is also reduced. Now the result of that is that the tightness in the system has instead shown up in refined products rather than in crude. And diesel is the clearest example of this, and the one most likely to be felled throughout the economy, since diesel prices reached straight through into trucking, freight, farm and cost and many other areas. The front-mount diesel benchmark in the US was recently around 195 dollars per barrel, versus Brent at 95 dollars per barrel. The difference between the value of a refined product and the crude used to make it is called a crack spread.

4:05For diesel, that crack spread reads around a hundred dollars per barrel an all-time high. Over time, that gives refiners a very strong incentive to bring back capacity where they can. If they do, crude demand should rise whilst inventories are already falling and middley supply so far remains constrained. We now expect a full recovery in middley supply to take well into 2027. On that path, oil inventories should keep falling throughout the fourth quarter of this year, as well as the first quarter of next year. We now forecast Brent to average a hundred dollars per barrel in the fourth quarter. Now for much of this year, the oil market had several sugar absorbers, strategic reserves, abundant barrels at sea, and unusually weak Chinese imports all helped. Those cushions are thinner now, that leaves less room for another disruption. Just as the road back to normal supply is getting longer. Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen, and share thoughts on the market with a friend or colleague today.

5:14The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.