Oil data is solid, so why is demand sentiment so weak?

Recently, Wall Street analyst BMO Capital Markets noted that US market sentiment has recently fluctuated from fears of a recession to expectations of a soft landing in a short period of time whenever there is a release of a benchmark. major economic data.

“Clearly, the pendulum has swung in favor of optimism, with the S&P 500 sharply recovering from recent selloffs and nearing record highs again,” said BMO Capital Markets’ investment strategy team in a note to investors. BMO’s observation describes the oil markets to a tee. Oil prices were on the back foot last week, pulling back from recent weeks’ gains as geopolitical fears eased and seemingly endless concerns about demand.

Last Monday, US Secretary of State Antony Blinken announced that Israeli Prime Minister Benjamin Netanyahu had accepted a ceasefire proposal to end the war in Gaza. Not surprisingly, Brent in the first month saw four consecutive trading days of lower highs, lower lows and lower settlements. Trend-following algorithmic traders appear unusually dominant, which commodities analysts at Standard Chartered attributed to the seasonal lull among other traders.

However, oil prices rose again on Friday after sources close to the White House reported that such a deal was unlikely because Hamas was unlikely to accept Israel’s terms, which include occupying the Philadelphia Corridor, which Israel claims that it offers Hamas a strategic lifeline. Oil jumped again on Monday morning after Libya’s government in Benghazi said the country’s oil fields were shutting down and all production and exports would stop.

Related: U.S. oil and gas drilling activity declines

Over the past four weeks, open interest for the main Brent and WTI contracts fell to a three-month low, falling by 256 million barrels, according to StanChart. Analysts noted that this could be due to a lack of consensus on how to trade oil during a rate cycle shift or exhaustion among regular fundamental longs, given that any big rallies this year have been immediately followed by prolonged withdrawals at any time. some downward trend hit the news feeds.

StanChart says sentiment was broadly weak, weighed down by concerns about outlook demand, despite strong real demand data.

StanChart was able to assess crude oil demand on a global scale release of Joint Oil Data Initiative (JODI) data on 19 August. According to commodities experts, global oil demand in June reached a healthy 103.01 million barrels per day (mb/d), an all-time high. Following JODI revisions, StanChart estimates that May demand reached 102.68 mb/d, the second highest monthly average after June. Average demand growth for the second quarter was 1.521 mb/d, close to StanChart’s forecast for full-year 2024 growth (1.514 mb/d). Meanwhile, global crude oil supply increase remains low, with June supply increasing by 160 kb/dm/m to 102.097 mb/d, well below the December 2023 all-time high of 103.162 mb/d.

The limited growth in global supply can largely be attributed to weak non-OPEC growth, particularly by the US. U.S. oil production will rise just 2.3 percent this year as shale producers discipline production and aim to return capital to shareholders. . Crude exports from US ports have averaged 4.2 million barrels per day so far this year, up just 3.5% y/y from a robust level. 13.5% growth in 2023. This year’s rate of growth is the lowest since 2015, when the country lifted a 40-year federal ban on domestic crude exports.

The only downside data point from the JODI report is that demand growth slowed, with demand growth in June reaching 788 thousand barrels per day (kb/d), a deceleration from 1.267 mb/d in May and 2.129 mb/d in May. April. Overall, StanChart predicted global demand would remain above 103 mb/d for the rest of 2024, before falling to 101.9 mb/d in January due to seasonality.

The latest weekly report from the US Energy Information Administration (EIA) is equally upbeat. After a small rise last week, US crude inventories resumed their slide, losing 4.65 million barrels (mb) w/w to a six-month low of 426.03 mb. This brings the cumulative drop in crude oil inventories over the past eight weeks to 34.7 mb, averaging 620 thousand barrels per day (kb/d). Distillate stocks decreased by 3.31 mb/g, to 122.81 mb. StanChart notes that while implied August distillate demand is weak, there is often a substantial upward revision in monthly data. Specifically, in May, Standard Chartered reported that the EIA had systematically underestimated demand for transportation fuel. According to analysts, US gasoline demand has been revised higher in 20 of the last 24 months, with an average revision of +146kb/d, which represents 1.6% of demand. Well, StanChart was later vindicated, with the EIA revising May gasoline demand 344 kb/d higher to 9.396 mb/d, good for 3.5% Y/Y growth. Jet fuel demand rose 5.9% y/y, while total oil demand was revised up 811 kb/d to 20.8 mb/d, good for 2.3% growth. Only demand for distillates remained weak in revised data, although the -3.6% Y/Y decline is significantly lower than the EIA’s forecast of -7.1% decline.

By Alex Kimani for Oilprice.com

More top reads from Oilprice.com