As oil prices are set to decline for the second consecutive year, there is widespread expectation of an oversupply in the oil market by 2025, while bullish traders are closely watching positive signals from the downstream market.
Asian fuel oil prices are at their highest level since 2022, while costs for major fuels in European shipping and power plants are at their highest seasonal levels since at least 2010. Diesel prices have risen in recent months, and naphtha prices used for plastic production are close to multi-year highs.
The strengthening of refined products relative to their crude oil manufacturing costs may indicate that the energy demand outlook is not as bleak as some have suggested. The International Energy Agency (IEA) predicts that even if OPEC and its allies choose to delay production increases in upcoming meetings, there will be a surplus situation next year.
Kieran Gallagher, the general manager of the Vito Group in Bahrain, stated this week: 'The fundamentals of the oil market do not look optimistic, but I think there are some bright spots.' He mentioned that the demand for fuel oil and naphtha has been 'very strong,' which has surprised the trading company.
Since mid-October, the global oil price benchmark Brent crude has been fluctuating in a narrow range between $70 and $77 per barrel, as the bearish supply surplus expectations are offset by geopolitical risks. A series of purchases in Asia, following the U.S. tightening sanctions on oil tankers related to Iran and supply disruptions from producers including Kazakhstan, has also led to improvements in the key calendar spreads, which are seen as indicators of market health.
Kitt Haines, a global crude oil analyst at the consulting firm Energy Outlook, stated, 'The spread was initially a bit undervalued, so part of the reason for its rebound now is chasing the trend, especially as the margins look better.' He added, 'There are definitely some Asian buyers reducing the risks surrounding Iranian crude oil.'
Recently, the spread hovering around the bearish futures premium structure (where forward prices are higher than recent supply prices) has rebounded. The spread between Brent crude oil contracts over the past two months has widened from 7 cents per barrel at the end of September to a bullish spot premium of 55 cents.
The spread between the two closest Brent crude oil contracts has rebounded to a bullish spot premium.
One last factor that bullish players in the oil market like to emphasize is the decline in inventories. IEA data shows that oil inventories in developed countries are about 100 million barrels below the five-year average, slightly below the global daily oil consumption, and lower than the five-year average. Some market observers say this could even drive a slight increase in the oil market.
Daan Struyven, co-head of commodity research at Goldman Sachs, stated, 'Based on relatively low global inventories, oil prices are undervalued by about $5.' The bank expects Brent crude oil prices to peak at $78 per barrel in June 2025, but oil prices the following year will drop to $71 per barrel.
Article reposted from: Jin Shi Data