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Has The Oil Market Flipped Into Surplus Territory?

The energy sector has continued to defy the broad market selloff in the new year, with seven of Tuesday's top eight gainers on the S&P 500 being oil and gas stocks, thanks in large part to growing geopolitical tensions.

WTI crude for March delivery closed +2.8% to settle at $85.60/BBL after losing 2.2% on Monday, while March Brent crude ended +2.2% at $88.20/BBL.

"Tensions are seriously heightened between Russia and the West, and if there is an invasion of Ukraine when energy markets are already so tight, the additional risk premium should continue to support prices and push it even higher," Pratibha Thaker at the Economist Intelligence Unit has told MarketWatch.

Top gainers were: APA Corp. (NASDAQ:APA) which closed +8.3% to top all major U.S. energy equities; Occidental Petroleum (NYSE:OXY) +8.1%, Halliburton (NYSE:HAL) +7%, Marathon Oil (NYSE:MRO) +6.5%, Diamondback Energy (NASDAQ:FANG) +6.3%, Devon Energy (NYSE:DVN) +6% and Schlumberger (NYSE:SLB) +5.9%. Apache and Devon are among our latest oil and gas picks.

The most recent push higher in oil prices has been fuelled by two main factors: widespread trader concern about limited spare capacity and demand optimism based on a view that the Omicron wave is waning and is unlikely to hold demand growth back. To wit, South Africa's latest wave of Covid, which began in late November 2021, is now declining as sharply as it once rose and is likely to be declared over, nationwide, soon. Omicron was first reported in South Africa. Concerns over spare capacity have amplified the effect of geopolitics, making the market highly sensitive to anything that could be perceived as a supply threat. Over the past week, that sensitivity has been shown in response to drone attacks against targets in the UAE and escalating tensions between Russia and Ukraine.

But a section of Wall Street is now sounding the alarm that the oil market could already have flipped into surplus territory.

In its latest weekly commodity market update, Standard Chartered has provided an upbeat note on base metals, saying supply cuts, deficits, and low inventories will lift base metals in 2022.

Unfortunately, the analysts are less sanguine about the oil trajectory, saying the markets could already have gone into surplus in the month of January.

Oil surplus

The U.S. Energy Information Administration (EIA) released its last Drilling Productivity Report (DPR) on 18 January. The EIA supply model predicts that U.S. shale oil liquids output will rise by 104.9 thousand barrels per day (kb/d) to 8.54 million barrels per day (mb/d) in February. This is the largest growth forecast made for the following month since December 2018 and would leave output 730kb/d below its November 2019 peak. 

The EIA forecasts that total U.S. supply will reach a new all-time high in December 2022, and the acceleration of growth shown in the DPR model suggests that shale oil liquids will set a new high some three months before total oil supply does. Permian oil liquids output surpassed the previous all-time high in December 2021, according to the DPR, which forecasts a rise of 80.3kb/d m/m to 5.076mb/d in February.

Related: U.S. Natural Gas Prices Jump On High Demand

Stanchart has used the January Joint Oil Data Initiative (JODI) data release on 19 January in conjunction with a series of individual country sources to make what it calls "our first solid estimate of global oil demand". 

Stanchart estimates global oil demand in November clocked in at 98.94mb/d, the highest for any month since December 2019, and higher m/m by 1mb/d, higher y/y by 3.78mb/d but 2.45mb/d lower than November 2019. The experts estimate that there was a global oil supply deficit of 774kb/d in November, the 10th consecutive month of deficit.

But here's the kicker: Stanchart estimates the market swung into a surplus of 1.54mb/d in January and will remain in surplus until July. 

Further, the analysts have forecast a total inventory build of 197mb in H1-2022, 31mb more than the H2-2021 stock draw.

OPEC's view

Actually, Standard Chartered is not the only expert who is calling out an oil surplus at a time when the markets seem overly worried about tight supply.

Three weeks ago, Bloomberg reported that OPEC+ has forecast the oil markets to be in surplus during the first quarter of 2022, with the excess supply clocking in at 1.4 million barrels per day (bpd). The big positive here is that OPEC's latest projection is some 25% lower than it forecast in early December, with lower expected oil supply from non-OPEC+ producing nations being the key reason for a downgrade in the surplus estimate.

According to the internal document of the Joint Technical Committee (JTC), expectations of strong demand in the current year have also resulted in a lower surplus forecast for the full 2022. OPEC+ now sees overall 2022 oil market surplus coming in at 1.4 million bpd, down from an early December estimate of a 1.7-million-bpd oversupply.

By Alex Kimani for Oilprice.com

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