Oil Week

Jul 11, 2022

Oil markets saw one of the largest single-day declines in history this week, but the realities of supply and demand have since sent prices bouncing higher. 

Tuesday’s oil price collapse might go down as one of the most memorable moments of the oil market’s tumultuous year of 2022. Despite being the third-largest daily loss since the onset of oil exchanges, declining crude did not trigger any changes along the futures curve, implying that the huge drop was primarily coming from widespread profit-taking as primarily non-physical participants panicked at the prospect of recession hitting the markets sooner than expected. The balances, however, do not lie – we are still living in times of extremely tight supply and even though it might take some time, the physical side of the equation will push prices back soon, OilPrice reports.

Whilst most assessments expected recession to kick in later this year, its first signs are already emerging with European economies potentially entering a recession in Q3. Seeing Brent futures losing a hefty 10% and dropping close to $102 per barrel, one would perhaps fail to notice that supply remains very much an issue – Libya’s almost complete degradation into an all-out internecine conflict and Norway’s offshore production seeing the first massive strike campaign of recent years have narrowed potential supply sources even further. 

Moreover, Saudi Aramco’s August OSPs also point towards little if any remaining spare capacity. Yet all of this is not enough to break the cycle of fear. Due to weak supply, robust demand, and exorbitantly steep backwardation, Saudi Aramco increased all its August 2022 formula prices, with the Asian Arab Light benchmark set at $9.30 per barrel, only 5 cents off the all-time high seen in May.

Saudi Arabia and Kuwait want more crude from Neutral Zone. Negotiators from Riyadh and Kuwait met this week to discuss ways to develop output from the jointly managed Neutral Zone, seeking to move the current production of 175,000 b/d to the nameplate capacity of 500,000 b/d.

Security in Libya gets even worse. Tensions have reached an apogee this week as Libyan protestors not only continue blocking oil fields but have also stormed the parliaments of both the Tripoli and Tobruk governments, decrying never-ending power cuts across the North African country.  

Norway goes for offshore oil strike. Starting from today, a union-organized strike of offshore platform workers will be gradually paralyzing some 10% of Norway’s oil and gas production after previous rounds of negotiations failed to yield any progress on wage demands. 

Uneven outlook scares oil permabulls. Amidst a deteriorating economic outlook, the past week has seen another decrease in long positions held in petroleum contracts by investors, though the sale of 9 million barrels last week is much milder than the hefty 71 million barrels in the week to 21 June. JP Morgan warns of $380 oil after price cap…