Brent gains on positive China data and new attacks on Russian oil processing

Positive China data and further attacks on Russian oil processing facilities lifts Brent yet higher. Brent crude gained 4.1% last week with a close on Friday 15 March at USD 85.3/b. Continued declines in US inventories, a bullish oil market outlook from the IEA and damages on Russia’s Rosneft Ryazan oil processing plant by Ukrainian drones helped Brent crude to break above the USD 85/b level. This morning Brent is adding another 0.4% to USD 85.7/b driven by a range of additional attacks on Russian refineries over the weekend and positive Chinese macro data also showing Chinese apparent oil demand  up 6.1% YoY for Jan+Feb.

Bjarne Schieldrop, Chief analyst commodities, SEB

Brent crude is getting a steady tailwind from declining US oil inventories. Steady and continued declines in US inventories since the start of the year has been nudging the oil price steadily higher but there has clearly been some resistance around the USD 85/bl level. US inventories continued that decline in data also last week with commercial crude and product stocks down 4.7 m b. Total US stocks including SPR declined 4.1 m b to 1580 m b which is now only 2 m b above the low point on 30 December 2022 at 1578 m b. These persistent declines in US oil inventories is a clear reflection of the global market in deficit where demand is sufficiently strong, cuts by OPEC+ are sufficiently deep while US shale oil production is close to muted with hardly any growth projected from Q4-23 to Q4-24.

Bullish report from IEA last week indicates that further inventory declines is to be expected. The monthly report from IEA last week gave an additional boost to this picture as it lifted projected oil demand for 2024 by 0.2 m b/d, reduced non-OPEC production by 0.2 m b/d and thus increased its estimated call-on-OPEC by 0.4 m b/d for 2024. The world will need steadily more oil from OPEC every quarter to Q3-24 and by Q4-24 the world will need 0.8 m b/d more from the group than it did in Q4-23. That is great news for OPEC+. There is no way that they’ll move away from current strategy of ”Price over volume” with this backdrop. The report from IEA last week is indicating that the gradual declines in US inventories we have seen so far this year will likely continue. And such a trend will give continued support for oil prices in the coming quarters. Oil price projections are lifted in response to this and last out is Morgan Stanley which raises its Q3-24 Brent forecast by US 10/b to USD 90/b.

SEB’s Brent crude forecast for 2024 is USD 85/b (average year) which implies that we’ll likely see both USD 70/b as well as USD 100/b some times during the year.

Attacks on Russian oil processing will mostly impact refining margins and crude grade premiums as crude supply is unlikely to be disrupted. The Ukrainian drone attacks on Russian oil infrastructure has surprised the market as many of them are deep within Russia. Facilities in Russia’s Samara region which is more than 1,000 km away from the Ukrainian border were attacked on Saturday. Oil processing plants and oil refineries are highly complex structures. If damaged by drones they can potentially be out of operation for extended periods. Plain oil transportation systems are much simpler and easier and faster to repair. The essence here is that we’ll likely not lose any oil supply while we might lose oil refining capacity due to these attacks. Most of the impact from these attacks should thus be on refining margins and not so much on crude oil prices. But when diesel cracks, gasoil cracks and gasoline cracks goes up then typically also light sweet crude prices goes up. As such there is a spillover effect from damages to Russian oil refineries to Brent crude oil prices even if we don’t lose a single drop of Russian crude oil production and supply.

Total US crude and product stocks incl. SPR has been ticking lower and lower so far this year and are now only 2 m b/d above the low-point in late December 2022. This is a solid indication that the global oil market is running a deficit.

Source: SEB graph and calculations, Blbrg data

Total commercial crude and product stocks (excl. SPR) has been ticking lower and lower so far this year. This has helped to nudge oil prices steadily higher. 

Source: SEB graph and calculations, Blbrg data

Brent crude looks very fairly priced at around USD 85/b versus current US commercial oil inventories

Source: SEB graph and calculations, Blbrg data

Call-on-OPEC by IEA: World will need more and more oil from OPEC through the year. In Q4-24 the world will need 0.8 m b/d more oil from OPEC in Q4-24 than in Q4-23.  

Source: SEB graph, IEA data

ARA refining margins have moved up so far this year => Refineries want to process more crude oil and thus they want to buy more crude oil.

Source: SEB calculations and graph, Blbrg data

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