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Oil supplies are tight politically, not structurally: Bank Julius Baer

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Oil demand is under pressure in the short term from the latest China-related supply chain hiccups and high fuel prices, which eventually bite into the household budgets. At the time of writing, Brent crude futures fell to $83.48 and US oil was down to $80.

Oil supplies are tight politically, not structurally: Bank Julius Baer
Crude oil bulls are taking some money off the table as optimism of the past few weeks has been replaced by concerns that demand for the commodity could be hit by inflation and supply chain disruptions.
At the time of writing, Brent crude futures fell to $83.48 and US oil was down to $80, after data from China, the world's biggest crude importer, showed September imports falling 15 percent year-on-year (YoY).
On Monday, the global benchmark hit $84.60, its highest since October 2018. Brent has risen for five consecutive weeks, while US oil has notched seven straight weeks of gains. Both benchmarks have clocked gains worth 15 percent since the start of September.
Why, oh why?
Crude oil demand is under pressure in the short term from the latest China-related supply chain hiccups and high fuel prices, which eventually bite into the household budgets. In the long term, the shift towards electric mobility is potentially pushing the prices, Norbert Rücker, Head Economics and Next Generation Research, Julius Baer told cnbctv18.com.
The shortages of natural gas and coal ahead of winters have prompted some to switch to crude oil. This comes from narrative and anecdotal evidence of oil use at power plants, Rücker said.
"This narrative has become another episode of the energy crunch and likely supports sentiment in the oil market for the time being," he said.
And oil producers’ reluctance to raise supply to pre-pandemic levels could also keep crude prices steady.
Last week, the organisation of petroleum exporting countries and allies (OPEC+), decided against opening the oil taps widely and instead chose to steadily increase the output. Analysts were expecting OPEC to raise the output as oil demand has been rising with economies recovering from the pandemic-induced fallout.
Instead, the group said it was "acting in view of the current oil market fundamentals." And that the decision would allow them to “continue to normalise the market situation."
Rücker said petro-nations are exploiting their temporary market powers and maintain a slow supply-easing path.
"Oil politics is a function of oil prices and not vice versa. Especially in situations where demand outstrips supplies, the petro-nations tend to find a common ground on output curbs, which then adds to price gains," he said.
On the other hand, shale drilling is reviving in America, with production expected to return to levels seen before the pandemic within a matter of weeks.
A hike in oil prices has injected life in private oil producers in West Texas and New Mexico. While major publicly-listed producers are holding steady, these private players are not likely to upset either oil prices or OPEC, despite what history suggests.
Before the pandemic, whenever crude oil prices rose, US producers would flood the market with oil. So much so that OPEC and US producers used to end up engaging in price wars. This competition seems to have died down as Europe and the majority of Asia need fuel or they would run out of power.
"This is the narrow ridge the petro-nations are balancing on, the maximisation of profits from their finite oil wealth versus the speeding up of oil’s long-term demise," Rücker said.
He added the bigger picture for oil seems to be changing. Oil is losing ground Wednesday on concerns that oil demand growth will fall. These concerns arise as major economies battle inflation and supply chain issues.
A lower GDP forecast and reactions to delta variant prompted US Energy Information Administration to cut global oil demand growth expectations for 2021. It cut expectations to 250,000 barrels a day (BPD). It now sees global oil demand growing by 5 million barrels a day to 97 million BPD.
"With demand growth slowing, the incremental return of shale and petro-nation supplies suggests the cycle is mature and the pressure on prices should grow with time," he said.
Supplies are politically tight, not structurally, Rücker added.


 
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