Oil prices are not likely to recover much as a significant surplus is looming on the market, according to analysts.
Brent crude oil prices fell below $60 at the beginning of last week following OPEC+’s announcement of a substantial production increase for June.
This development will be incorporated into upcoming forecasts from OPEC and the International Energy Agency (IEA) in the next week.
The US Energy Information Administration’s May forecasts did not yet reflect these changes due to their recent announcement.
Demand concerns
“Albeit OPEC+ and US government policy announcements have been the catalysts for April and early May price declines, there are clearly worrisome indications in fundamental oil market data,” David Wech, chief economist at Vortexa, said.
So far this year, demand indicators for conventional liquid oil have been concerning, according to Wech.
Each month has shown a year-on-year decrease in seaborne crude and motor fuel arrivals, Vortexa data showed.
Liquids arrivals, excluding LPG+, have averaged 1.8 million barrels per day less in recent months compared to January-April 2024, the data showed.
April’s figures, along with three- and four-month moving averages, represent the lowest levels observed since February 2021.
Source: Vortexa
Wech added:
Lower crude arrivals are not necessarily a surprise as mature refining hubs in Asia or Europe are experiencing declines in implied refining runs, as poor demand combined with high product exports from the Middle East and India are weighing on margins.
As a result, Asian and European refiners are importing more finished motor fuels and less crude oil.
This trend further complicates the understanding of the global decrease in gasoline, jet fuel, and diesel trade volumes.
Increased availability and robust demand in power generation are driving simultaneous price increases for both LNG and LPG, Wech said.
Consequently, these gases directly, and even more significantly indirectly, compete with liquid fuels like oil.
How much will OPEC+ add to the market?
The IEA previously noted that the reported increase in OPEC+ oil production appears larger than reality because some countries are already exceeding their planned output.
“Nevertheless, it is now likely to predict a higher oversupply, as the outlook for global oil demand is unlikely to have improved,” Barbara Lambrecht, commodity analyst at Commerzbank AG, said.
Voluntary export curtailments by eight countries within OPEC+ since December 2022 have been less significant than their announced production cuts implied.
The eight members, which include Saudi Arabia and Russia, had been adhering to voluntary output cuts of 2.2 million barrels per day since early 2024.
The members have started unwinding these cuts from April, with large increases of 411,000 barrels a day scheduled for May and June.
The decision to accelerate the return of barrels may stem from this observation.
Source: Vortexa
Notably, by June, the combined production targets for the eight nations are set to increase by 959,000 barrels per day compared to March, according to Vortexa.
Following the announcement, oil prices declined sharply last week, particularly due to widely acknowledged challenging market fundamentals.
Notably, crude oil within the supply chain, held in storage tanks and tankers, has accumulated significantly, increasing by over 150 million barrels since mid-February, Vortexa data showed.
“Significant extra supplies would be likely to move stocks above that crucial benchmark over the next couple of months,” Wech said.
Kazakhstan continues to overproduce
Kazakhstan’s oil production remains considerably above agreed levels, and the country seemingly intends to maintain this output in May.
Kazakhstan’s Energy Ministry projects that its daily oil and condensate production will remain steady at 277,000 tons in May, matching April’s output.
In March, production amounted to 260,000 tons per day.
The production reported for April and May corresponds to a good 2 million barrels per day, according to Commerzbank.
The German bank said condensate production is approximately 260,000 barrels per day, suggesting a crude oil production of around 1.75 million barrels per day in Kazakhstan.
“The ceiling agreed for May would therefore be exceeded by around 300 thousand barrels per day if the compensatory cuts are not taken into account,” Carsten Fritsch, commodity analyst at Commerzbank, said in the report.
This increases the risk that Saudi Arabia will also push for a strong increase in oil production in July.
The downside risks for oil prices are therefore increasing further.
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