Oil prices have shot higher largely due to the reversal (positive gamma and short-covering) of the very factors that caused the plunge in December. The perceived health of the global economy has also improved from just a week ago, with the Fed stating that it will be sensitive to growth warnings (implying that the Fed is no longer hiking for the sake of it), while the extended talks between China and the US has given the market hope that the trade war is unlikely to worsen.
The physical market is also holding up better than expected despite trading peak turnaround barrels. This is not just due to OPEC cuts and some continued outages such as in Libya, but also due to the return of Chinese buying. To ensure that they secure more licences in the second batch (expected in June) following a small first round, the Chinese teapots are back with a bang.
Some of the prompt tightness is also linked to weather issues that have curtailed exports, which is temporary by nature. Moreover, there are plenty of warning signs still around for the global economy (and the US-China trade war), so a pullback in prices is not off the cards yet.
But once we look past the expected softness in crude balances during the turnaround period, H2 19 balances look constructive. Even assuming OPEC does not extend the cuts in H2 19 and continued strong US production growth due to new Permian pipelines coming online, H2 19 crude draws are over 1 mb/d, due to the expectations of higher runs ahead of IMO 2020 and the ramp-up of new refineries. However, Saudi Arabia may be keener than expected to extend the deal as the Kingdom needs high oil prices to achieve an ambitious revenue target amid the drying up of capital inflows in the aftermath of the Khashoggi affair. For once, the Saudi budget matters.
|Global crude stock change estimate, mb/d||OPEC production and forecasts, mb/d|
|Source: Energy Aspects||Source: Argus Media Group, Energy Aspects|