Oil markets pricing in demand loss or more output: Vitol

The global oil markets are pricing in either a demand loss or more output from countries such as the US amid the global release of oil stocks and recessionary threats in some economies, the head of Vitol Asia said April 3.

"For the market to trade down as it has done, that's telling you that the market is expecting a demand loss... or a production increase from places like US shale of more than 2 million b/d," Mike Muller told the Gulf Intelligence daily energy markets podcast.

The US announced on March 31 plans to sell an unprecedented 1 million b/d from the Strategic Petroleum Reserve for the next six months as part of efforts to rein in gasoline prices that have soared following Russia's invasion of Ukraine.

The International Energy Agency followed suit and agreed on April 1 to a second emergency release of oil reserves in response to "market turmoil' caused by Russia's invasion of Ukraine, and said details of the release would come early next week.

The news of the global oil stocks release sent oil prices down, with Platts Dated Brent assessed on April 1 at $107.425/b, down 2.42% on the day, according to S&P Global Commodity Insights data.

Russian supply loss

The IEA had previously estimated that Russian oil losses could reach 3 million b/d in the second quarter, but most forecasts are more cautious estimating 1 million b/d - 2 million b/d.

S&P Global forecasts 2.8 million b/d of Russian crude production shut-ins due to export dislocations from sanctions and buyer aversion from late April through the end of 2022. Disruptions are estimated to moderate to 2 million b/d by end-2023 as barrels are redirected and/or more cargoes are "cautiously purchased."

The crude markets are also dealing with lockdowns in China, the world's second largest oil consumer, which has imposed restrictions on movements in several cities to fight the spread of omicron variants.

Moreover, OPEC+ is likely to keep increasing oil production quotas according to previous plans, despite the disruption of Russian supplies, Muller said.

"There was a global stock draw that the world is predicting on the basis of OPEC+ continuing to hold their line, not least because there is very little extra production available out of anywhere than core OPEC these days," he said.

Holding the line

OPEC+ ministers in their March 31 meeting stuck to their planned 432,000 b/d production hike in May, despite pressure to tap additional spare capacity and boost output further.

The OPEC+ alliance, which controls some half of global oil supply, has gradually rolled back the record production cuts it instituted during the worst of the pandemic, saying it aims to balance supply with emerging demand from the recovery.

Internal OPEC+ analysis showed that the group pumped 1.053 million b/d below its targets for February, as many members were unable to raise production due to natural field declines, inadequate infrastructure and a general lack of investment exacerbated by the coronavirus market crash.

The delay in reaching an Iranian nuclear deal is also another setback for oil markets, which were anticipating a return of their crude in the second quarter of 2022, Muller said.

"Everyone was expecting the return of Iranian supplies," he said. "I think nobody believes that is going to happen in Q2 and it looks less likely than it was a few weeks back for various reasons."