Oil market tightens as geopolitical risks grow
Oil prices have seen significant strength through March and early April. ICE Brent broke above US$90/bbl, trading at its highest level since October. Growing tension in the Middle East is obviously one reason for the boost. However, that increased geopolitical risk comes at a time when the oil market was already set to tighten.
The oil market has been pushed into deficit after a handful of OPEC+ members announced they would roll over their additional voluntary cuts, amounting to 2.2 million barrels a day (b/d) from the first to the second quarter of 2024. Our numbers suggest this will leave the market in a deficit of around 1 million b/d this quarter.
The scale of the deficit suggests that oil prices remain well supported over the coming months and as we enter the summer driving season through the third quarter. As a result, we expect ICE Brent to average $88/bbl over the second and third quarters.
OPEC+ will be key to the outlook for the second half of the year. Additional voluntary cuts are set to expire towards the end of June. As a result, the market is set to be in a small surplus over the second half of 2024. However, the key upside risk is if OPEC+ decides on a further rollover, which would tighten the market still further. If that happens, we’ll be looking to revise our forecasts higher still.
Europe exits winter with record gas storage
Europe has exited the 2023/24 heating season with record natural gas storage. It was 58% full at the end of March, above the 56% we saw last year and well above the 5-year average of 41%. Comfortable storage has kept the market from moving significantly higher. Gas flows into Europe have been stable through most of the winter, while we have had some milder weather through February and much of March.
We expect prices to remain under pressure through the injection season. With storage likely to be full once again ahead of next winter, we could see prices coming under further pressure later in the third quarter. We expect TTF to average EUR25/MWh over 2Q24 and 3Q24.
There are some further signs of gas demand recovering in Europe, with some Year-on-Year increases in gas consumption in recent months. However, demand remains well below pre-Ukraine war levels. Our gas balance suggests that European gas demand in 2024 could increase 9% YoY, and Europe would still manage to hit the European Commission’s target of having storage 90% full by 1 November.
As we approach the end of this year, a concern for the market is what happens to Russian pipeline flows to Europe via Ukraine. Ukraine has made it clear that it has no plans to extend the transit deal with Gazprom, which expires at the end of December. This puts roughly 40mcm/day of Russian pipeline flows at risk. We believe that Europe will be able to find an alternative supply if this volume is lost. However, the market is still likely to react to such a development.
Source: Hellenic Shipping News
