Oil may get a boost of gradual rebalancing; Dow, NQ may slip

·         On Tuesday, Wall Street was almost flat on hawkish Fed talks despite NVIDIA/Tech boost; Fed may not cut before Nov’24 US Presidential election

Oil slips over 4% in Q2CY24 (till 21st May) on fading hopes of an imminent rebalancing amid higher supplies by US and allied oil producers (Brazil, Mexico, Canada, etc) to balance extended/permanent OPEC+ production cut (voluntary/involuntary), demand recovery from China, higher demand from India (during election campaign) and lingering geopolitical tension ranging from Gaza war, Israel-Iran duet, Red sea oil shipping disruptions by Houthi rebels and Russia-Ukraine war. The latest edition of geopolitical tension comes from the sad death of Iran’s President in a helicopter crash and the start of the annual nuclear war drill by Russia.

On early Monday European session, Gold jumped to a fresh life time high of almost $2450 from Friday's closing $2415 after confirmed reports about the death of Iran’s President Raisi in a helicopter accident. Oil also surged to over $80, while stock futures slipped on the concern of any fresh geopolitical tension over the ‘accidental death’ of Iran’s President Raisi in a helicopter crash after an Iran-Israel friendly duet a few weeks ago.

Iran was seen as a financier and weapon supplier (drones, missiles) to various militant groups in the ME including Hamas, Houthi, Hezbollah and even Russia (drones). Iranian President Raisi was considered a front-runner to succeed Supreme Leader Ayatollah Ali Khamenei. The market was concerned that after the investigation, Iran may point the finger at the US/Israel for some foul play. Iran’s President Raisi was using the age-old US-made Bell-212 Helicopter developed in the 1960s and 70s without a modern-day SOS signaling system; even though there was no Mayday call from the pilot during the crash. But US (Trump) Sanctions have made it difficult for Iran to obtain parts or new aircraft.

Further On Tuesday Russia starts annual tactical nuclear weapon drills. The Russian Defense Ministry confirmed that the military started the first phase of the planned tactical nuclear weapon exercises. During the drills, units of the Aerospace Forces will be trained in fitting special warheads, including hypersonic ballistic missiles. The ministry said the purpose of the exercises is to maintain combat readiness, including the use of tactical nuclear weapons, to "unconditionally ensure the territorial integrity and sovereignty of the Russian state in response to provocative statements and threats of individual Western officials." As a result of Russia/Putin’s nuclear threat, Gold and oil also got some boost briefly as it is a normal annual exercise irrespective of any narrative.

Overall, oil is not much boosted like Gold as U.S. President Biden may not allow any real sanction on Iran, which may cause another spike in oil towards $100 just before the U.S. Presidential Election in Nov’24. Biden is already trailing Trump due to various domestic issues like the higher cost of living (elevated inflation-still around 20% higher than pre-COVID levels), a flood of immigration (legal/illegal), which is affecting well-paid employment opportunities for native Americans (as the migrant labor force is ready to do the same work with lesser pay).

Also, American Muslims or even most non-Muslim voters are not happy about the killing of innocent civilians including children by Israel in the same Gaza war, which is now looking more like genocide. Elsewhere, Putin may be also hatching various conspiracies to keep oil hotter above $100 ahead of Nov’24 election to ‘topple’ the un-friendly Biden government and bring the ‘trusted old friend’ Trump back to the White House for another term, so that Putin may be able to exit Ukraine war dilemma gracefully (face-saving exit).

Competitor China is also a big issue for US election/politicians; generally anti-China stance is a common thing ahead of the US election. Although Biden is less China-phobic than Trump, on Wednesday (17th April), Biden extended Trump's tariffs on Chinese metals, iron & steel, which was not taken by Wall Street in a positive/sporting spirit. Biden has also not withdrawn some portion of Trump tariffs on Chinese goods as the US treasury needs higher revenue (import duties) to bring down elevated borrowing costs on never-ending public debt, which is now hovering around 15% of core operating revenue, just around the redline for any AE.

Thus Trump tariff will continue for some additional revenue, irrespective of Democrats (Biden) and Republicans (Trump). On the other side, China allowed USDCNY above 7.00 to even 7.50 (average 7.25) to neutralize Trump tariff effects, while US consumers are also able to buy Chinese consumer goods at an almost affordable rate. On Tuesday, the U.S. DEA announced to Release of 1 MB of Gasoline from SPR after Biden’s approval rating plunged to around 36%, the lowest in two years after Biden’s Presidency.

On 15th May, IEA published its May Monthly Oil Report (MOR):

·         OPEC+ output set to fall 840k bpd this year if curbs remain

·         OPEC+ output to rise 330k bpd in 2025 assuming curbs stay

·         Global oil demand will grow by 1.2 million bpd (+1.20 mbpd) in 2025, slightly up from the previous forecast

·         World oil supply to increase by 580,000 bpd (+0.58 mbpd) this year to record 102.7 mbpd

·         Global oil inventories surged by 34.6 million barrels in March as oil on water swelled to fresh post-pandemic high; early data suggests global oil stocks rose further in April

·         The oil market looks more balanced overall in 2025

·         Even if OPEC+ voluntary production cuts were to stay in place, global oil supply could jump by +1.8 mbpd in 2025, compared with a +0.58 mbpd increase in 2024

·         IEA cuts oil growth demand forecast for 2024 by -0.14 mbpd to 1.1 mbpd

·         IEA referring to its lower 2024 demand growth forecast: Weak deliveries, notably in Europe shifted Q1 OECD demand into contraction

Full text of IEA MOR-May’24

Global oil demand is set to rise by 1.1 mb/d in 2024, 140 kb/d less than projected in last month’s Report as weak deliveries, notably in Europe, shifted first-quarter OECD demand into contraction. The outlook for 2025 is comparatively unchanged, with the pace of growth now marginally surpassing 2024 at 1.2 mb/d.

 World oil supply is projected to increase by 580 kb/d this year to a record 102.7 mb/d as non-OPEC+ output rises by 1.4 mb/d while OPEC+ production falls by 840 kb/d, assuming that voluntary cuts are maintained. Global gains of 1.8 mb/d are expected in 2025 as non-OPEC+ add a further 1.4 mb/d. In April, world oil supply fell 200 kb/d to 102 mb/d.

Global refinery margins eased across all regions in April, as weaker-than-expected demand growth underpinned a collapse in middle distillate cracks and lower throughput levels. Annual growth in refinery activity is forecast to accelerate from just above zero in 1Q24 to 500 kb/d in 2Q24 and 1.8 mb/d in 2H24.

Global oil inventories surged by 34.6 mb in March, as oil on water swelled to a fresh post-pandemic high. On-land stocks fell by 5.1 mb to their lowest level since at least 2016, as total OECD stocks declined by 8.8 mb to a 20-year low while non-OECD inventories built for the first time since November. According to preliminary data, global oil stocks rose further in April.

Brent futures eased from a six-month high above $91/bbl in early April to around $83/bbl as concerns about a wider Middle East conflict subsided and softer macro sentiment weighed on prices. Amid heavy investor selling and weak demand, middle distillates led the decline, as the diesel forward curve slipped into contango after years of backwardation and cracks fell to one-year lows.

Spring sell-off

Benchmark oil prices corrected sharply lower throughout April and early May, as concerns over the health of the global economy and oil demand fueled a sell-off. Reports of progress towards a truce in Gaza also weighed on oil prices, although geopolitical tensions remain high. Brent crude futures traded at around $83/bbl at the time of writing, down nearly $8/bbl from a month earlier despite signs of tightness in the crude oil market.

The spring sell-off was most notable in middle distillate markets, as diesel and jet fuel cracks collapsed while the NYMEX ULSD front-month contract flipped into contango after years of backwardation. In the process, global refinery margins fell to near two-year lows, spurring talks of run cuts that could undermine the seasonal rebound in throughput rates. The slump in European refinery margins in April outpaced those seen in the US Gulf Coast and Singapore, reflecting its heavy reliance on diesel output and weak regional demand eroding the premium needed to attract long-haul imports from East of Suez.

Poor industrial activity and another mild winter have sapped gasoil consumption this year, particularly in Europe where a declining share of diesel cars in the fleet was already undercutting consumption. Following a 210 kb/d annual contraction in 2023, European gasoil demand declined by another 140 kb/d y-o-y in 1Q24. Combined with weak diesel deliveries in the United States at the start of the year, this was enough to tip OECD oil demand in the first quarter back into contraction. Global oil demand is now expected to rise by 1.1 mb/d in 2024, 140 kb/d less than projected in last month’s Report. Our global outlook for 2025 is largely unchanged, with the pace of growth now marginally eclipsing 2024 at 1.2 mb/d.

The health of global oil demand will likely be a key topic for discussion when OPEC+ ministers meet in Vienna on 1 June to chart production policy for the remainder of the year. Despite the recent weakness, our current balances show the call on OPEC+ crude oil at around 42 mb/d in the second half of this year – roughly 700 kb/d above its April output.

Next year, the market looks more balanced overall. Even if OPEC+ voluntary production cuts were to stay in place, global oil supply could jump by 1.8 mb/d compared with this year’s more modest 580 kb/d annual increase. Non-OPEC+ output is forecast to expand by 1.4 mb/d in both years, while OPEC+ output flips from an 840 kb/d decline this year to growth of 330 kb/d in 2025. The United States, Guyana, Canada, and Brazil continue to dominate gains, even as the pace of the US supply expansion decelerates.

The June meeting may also look closely at global oil inventories as a gauge for the delicate balancing act of world oil demand and supply. Preliminary data show further stock builds in April as onshore inventories skyrocketed after oil on water was discharged. Increasing trade dislocations had pushed oil on water to a post-pandemic high in March, while onshore stocks were at their lowest since at least 2016. A return to historical average stock levels will be key to avoiding renewed market volatility.

Overall, the mix of EIA and OPEC production/demand data shows signs of tightening after Q1CY24 even as OPEC+ production cuts are being neutralized by higher productions from the U.S., Canada, Brazil, Chile, Guyana, Iran, Venezuela, and Mexico.

 

Highlights of OPEC MOR-May’24:

·         OPEC crude output fell by 48,000 bpd in April to 26.575 mln bpd

·         Saudi Arabian crude output rose by 2,000 b/d in April to 9.03 mln b/d

·         Non-doc are countries not participating in the declaration of cooperation

·         Iran crude output rose by 14,000 bpd in April to 3.21 min bpd

·         OPEC sees demand for doc crude 2024 at 43.2 million bpd in 2024 & says they will now only forecast demand for doc crude

·         OPEC leaves 2024 world oil demand growth forecast unchanged at 2.25 million bpd

·         OPEC crude output fell by 48,000 bpd in April to 26.575 mln bpd

·         Despite some downside risks, there is further upside potential for global economic growth in 2024

·         OPEC leaves 2025 world oil demand growth forecast unchanged at 1.85 mbpd

Overall, if we take an average of OPEC+IEA+EIA data, there was some glut around +0.26 mbpd (more supplies than demand) in 2023, whereas there may be some rebalancing (lower supply than demand) of -0.21 mbpd projected in 2024.

Conclusion:

Overall, global production/supply is now showing some signs of rebalancing/tightness in Apr’24 amid lingering oil movement disruptions in the Red Sea, Iran-Israel and Russia-Ukraine geopolitical tensions, and hopes & hypes of higher demand from China and India (election season-higher demand for petrol/diesel for political campaigning).

OPEC+ production cut narrative is now sounding more like central bank jawboning rather than real action/cut as apart from Saudi Arabia, none of the OPEC+ producers have meaningful real effective spare capacity to influence the global supply. Also, Saudi Arabia has some limits as oil revenue is the main source of national income. The same is almost true for other big OPEC+ producers. Moreover, OPEC+ is steadily losing market share as N-OPEC+ led by the US is increasing their production levels to nullify the OPEC+ cartel in this war of sheikhs and shale.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, Gold and oil

Whatever may be the narrative, technically Dow Future (40132) has to sustain over 40400 for a further rally to 40500/40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 40350-40200 DJ-30 may again fall to 39700/39200-38900/38500 and 39100/37400 in the coming days.

Similarly, NQ-100 Future (18750) has to sustain over 18900 for a further rally to 19100/19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 18850-18750, may again fall to 18350/18100-18000/17900 and 17800/17700-17600-17500 and further 17400/17300-17100/17000* in the coming days.

Technically, SPX-500 (5330), now has to sustain over 5400 for any further rally in the coming days; otherwise, sustaining below 5375 may fall to 5275/5175-5100/4990 and 4950/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2415) has to sustain over 2455 for a further rally to 2475/2500; otherwise sustaining below 2450/2440-2435/2430, may again fall to 2398/2372-2353/2335 and 2310/2300-2290/2370 in the coming days.

Technically Oil (78.30) now has to sustain over 76.50-75.00 for any recovery to 78.50/80.50-82.00/85.00-88.00-90.00/91.00-95.00; otherwise sustaining below 74.50, oil may further fall to 73.00 and 72.00-70.00 in the coming days.