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Financial markets now consider oil a 'buy', Vitol's Asia head says

Highlights

Dated Brent over $90/b

Refined product stocks on water 'pretty high'

Russia may want gasoline prices to go up

  • Author
  • Claudia Carpenter
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  • Jonathan Fox
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Investors in the financial markets are convinced that crude oil is a "buy" now with $100/b in sight, Vitol Asia's head Mike Muller told a podcast on April 7.

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"Fundamental physical changes in the oil markets have taken a second tier back seat to the money flows, and financial markets have convinced themselves this one is a buy," Muller told the daily Gulf Intelligence energy markets podcast.

Platts, part of S&P Global Commodity Insights, assessed Dated Brent at $90.86/b on April 5, the highest since Oct. 23. While that may trigger some traders to sell out with prices in a new trading range about $90/b, OPEC+ and Saudi Arabia will be increasingly tempted to use spare capacity if prices continue to rise, Muller said. While crude inventories have come down, refined product stockpiles on water are still "pretty high," he said.

Donald Trump

The runup to the US presidential election in November may also influence oil policy.

"We should never forget that Russia and Saudi Arabia have it in their hands to not only relax the market but to bring US gasoline prices up before the election," Christof Ruhl, senior research scholar at Columbia University's Center on Global Energy Policy, said on the podcast. "Now I'm not a conspiracy theorist at all, but in this instance I think the desire at least on Russia's part to see Donald Trump win the election must be an overwhelming incentive."

Financial participants in the oil markets have decided in recent weeks, after being on the sidelines for most of the past 12 months, that crude oil and commodities in general correlate extremely well with inflation, Muller said. And historically, their position is still relatively low, he said.

"We have a market that is not necessarily tight in the prompt but given most people's projections for later in the year, most people, most consultants, most experts, most advisers are calling for stock draws later in the year and that's giving a firm underpinning to the fundamental picture," Muller said. "All the while OPEC and Saudi in particular have the option to change that picture by gradually letting volumes back into the market from their spare capacity should markets get even stronger and that not be to their liking."

On the plus side, Muller said, India's economy is growing faster than expected, China is taking steps to boost economic growth, industrial manufacturing globally is positive, while Kurdish oil flows from northern Iraq are not back yet, Sudan supply has been disrupted by war and at one point there was some 1 million b/d of Russian products out because of multiple attacks by Ukraine on Russian refineries. Some of Russia's crude supply has made up for the products supply to the point where it is possible that Russia's crude exports have reached capacity through Baltic Sea ports, he said.

Not petering

Vitol is projecting that demand for refined oil products will be "a lot, lot" higher in the second half of 2024 than in 2023, perhaps as much as 2 million b/d, Muller said. Global oil demand is also expected to be 1.7 million-1.8 million b/d higher this year, he said. "We're not in any way petering out toward peak oil here," he said. "We're at one of the fastest year-on-year growth rates we've ever seen in the last 20 years of history."

While Muller said he has always been surprised at the refining industry's ability to bounce back, Ruhl said Russia will have "huge difficulties" repairing its refineries because of sanctions. "They're not getting replaced in the next week or so," he said.

Ukraine's ability to keep hitting Russian refineries could become a "game changer" because refining margins might soar, gasoline prices will go up and that could lead to more inflation, Ruhl said.

As prices rise, OPEC+ and Saudi Arabia are likely to start selling more oil, Muller said. "There is a view that there will be some pragmatism if $90/b becomes $100/b Brent and there will be a bit more oil released into the market. That seems to be on people's minds."