June 22, 2024
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Why Global Oil Markets Stagnate

Global oil markets have shown little change over the past couple of weeks, with pessimism remaining high and hedge funds leaning towards the short side.

Over the past week, Brent crude prices have stayed within a narrow range of $83.45-$83.60 per barrel, resulting in lower volatility. The realized annualized 30-day front-month Brent volatility settled at 16.9% on May 20, down 2.1 percentage points week-on-week, while the 10-day volatility dropped 7.4 percentage points to 12.5%.

According to OilPrice.com, Brent closed at $83.71 per barrel on May 20, a slight increase of $0.35 from the previous week, though this was below the $1.44 rise predicted by Standard Chartered’s machine-learning oil price model, SCORPIO.

Oil markets continue to lag behind the strength exhibited by metals and natural gas markets. Standard Chartered forecasts that bearish sentiment and low market volatility will persist until OPEC+ announces new policies at its next meeting in early June. However, the exact timing of any unilateral actions remains uncertain as voluntary cuts fall outside the scope of the OPEC+ ministerial meeting. Positive developments from OPEC+ could potentially trigger another oil price rally.

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In stark contrast, natural gas markets have turned much more positive in recent weeks due to improved supply-demand balances. Henry Hub gas prices have surged 55.2% over the past 30 days to $2.78 per MMBtu, while TTF gas prices have jumped 42.0% from their February lows to €34.6 per MWh.

An early heatwave in Texas has bolstered U.S. natural gas, making it the strongest major commodity for the second consecutive week. In Europe, positive sentiment is driven by concerns over prolonged maintenance outages in Norway, with the Troll field and Kollsnes processing plant still offline. Pipeline gas supplies to Europe hit a low of 178.9 million cubic meters per day on Tuesday, the lowest since September, while the previously significant inventory buildup has slowed.

According to Gas Infrastructure Europe (GIE), EU gas inventories stood at 77.88 billion cubic meters (bcm), a year-on-year increase of 2.11 bcm. However, this surplus is being steadily eroded, having fallen on 32 of the past 34 days for a cumulative decrease of 5.5 bcm. Last week, the continent’s gas inventories increased by 2.28 bcm, lagging behind the 2.61 bcm increase from the same period last year and the five-year average of 2.67 bcm. The slower pace of inventory increases, coupled with strong LNG demand in Asia, is supporting the ongoing natural gas rally.

However, it remains to be seen if this gas rally will hold, with predictions that Europe’s gas flows will gradually return to normal by the end of May. Additionally, warmer weather forecasts until the end of May have dampened gas demand, resulting in European gas storage facilities surpassing 67% capacity.

The end of the early-year oil price rally has impacted energy stocks, which have lost 5% over the past six weeks, bringing their year-to-date gains to 11.46%, slightly below the S&P 500’s 11.56% return. The energy sector has slipped to the fifth best-performing sector behind Communication Services (21.32%), Information Technology (16.60%), Utilities (14.51%), and Financials (11.80%). The Real Estate sector remains the only sector in the red, with a -4.21% return so far this year.

Despite this, Wall Street remains largely bullish on oil and gas stocks. Oppenheimer Asset Management recently expressed a positive outlook on equities, especially in the Energy and Consumer Discretionary sectors. “We remain positive on equities,” stated Oppenheimer in an investor note. “92% (459 firms) of the companies in the S&P 500 index having reported Q1 results, earnings are exceeding expectations. Profits are up 5.5% overall on the back of 3.8% revenue growth,” the firm added.

Eight of the 11 sectors are showing positive earnings growth, with six experiencing double-digit increases, including communication services (+42%), consumer discretionary (+39%), utilities (+31%), information technology (+14%), financials (+11%), and real estate (+11%). Despite another disappointing earnings season, Oppenheimer believes that the Energy sector likely has further upside, though not necessarily in a straight line.


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