Crude oil starts to soften

Oil looks softer in trading today. Is a sell-off on the way?

Crude oil trading

Oil benchmarks start to pull back from multi-year highs

While oil started the week on the front foot, two of the key crude benchmarks had pulled back a touch on Tuesday morning.

Last week’s bull run may be starting to slow.

West Texas Intermediate and Brent crude were both down around 0.4% on the day. Both had started the week in the green, but now investors appear to be engaging in a sell-off.

At the time of writing, WTI was trading for around $83.92, down from Monday’s high of $86.01.

Brent’s pullback showed a drop from $88.88 on Monday to trade for around $87.02 in the Tuesday morning session.

Despite a Saxo Bank Commitment of Traders report showing commodities being bought at the fastest pace for two years last week, the sentiment has turned towards sell-off.

There are a couple of factors at play here. Firstly, the Fed’s hawkish pivot, and talk of raising interest rates across the year, has caused many investors to dump their assets. Commodities usually weather such storms, yet there are indicators the sell-off is there.

Secondly, there is bearish EIA data. The report for the week ending January 14^th showed the year’s first oil stockpile build up. Inventories rose by 0.5m barrels. Not ground-breaking, but perhaps enough to give some oil traders jitters.

Most commentators and oil organisations, such as OPEC, expect demand to rise substantially this year. Indeed, many observers think an $100 oil price is still on the cards.

$100 oil in 2021?

Morgan Stanley is the latest Wall Street bank to predict an $100 per barrel crude price. The bank believes we could see that happen in the second half of 2022.

“The key oil products markets (gasoline, jet fuel, and gasoil/diesel) all show strong crack spreads, steep backwardation, and inventories that have fallen to low levels. None of this signals weakness,” Morgan Stanley analysts wrote in an investors note.

Previously, Bank of America and Goldman Sachs had made similar predictions.

Demand for crude and finished oil products is forecast to return to pre-pandemic levels as the world learns to live with the Omicron variant. The UK, for example, has virtually removed all COVID restrictions thanks to a successful vaccination and booster roll out.

Increased OPEC+ output leading to lower cabal capacity could also be a support. Only the real big hitters, like Saudi Arabia and Russia, have the ability to bump up production in line with OPEC’s monthly increases, while keeping some capacity in reserve.

A prolonged oil price rally could be triggered by these conditions. Lower spare production may cause markets to think oil producers have a lower buffer to offset any sudden supply disruptions. These are always lurking. Take the recent Libyan blockade or civil unrest in Kazakhstan as an example.

A war between Ukraine and Russia, though terrible on a geopolitical and local scale, could also support prices, but this very extreme and something we’d hope would be avoided for humanitarian reasons.

Russian and US oil to peak in 2023?

New reports suggest Russian and US oil output could hit new highs next year.

According to the EIA, the United States will see a 6% rise in production in 2022, followed by a further 5% increase across the next year.

“We forecast that, in 2022 and 2023, crude oil prices will remain high enough to encourage growth in the number of active drilling rigs and continued improvement in drilling efficiency,” the energy agency said.

America’s crude oil production is set to average 12.4 million barrels per day (bpd) next year, especially with new shale capacity coming online.

That said, the US reduced the number of active oil rigs last week. The Baker Hughes rig count fell by one, although rig counts are 60% higher than this time last year.

Rystad Energy has made similar claims about Russian output. The world’s third largest oil producer is already pumping 2% more crude this year, with the total thought to peak at around 10.6m barrels by the year’s end.

According to Rystad, output will continue to increase until it peaks at 12.2m barrels per day by mid-2023.

There are some obstacles getting in the way. A combination of Russia’s extreme climate, rising depletion rates and international sanctions potentially blocking access to investment is weighing on the development of Russian hydrocarbon projects.

We’ll have to wait and see if these forecasts bear fruit.