Gil Befman, Chief Economist of Bank Leumi (photo by Oren Dai, Flash 90, Magma Images)
The chief economist of Bank Leumi, Dr. Gil Michael Bafman, conducted the weekly oil review today (Monday), in which Bafman claimed that “during 2023 the price of oil is expected to drop to a level of about 80-85 dollars per barrel”, this despite the fact that oil prices continued rise in the last week, and the price of a barrel of BRENT oil reached about 85.63 dollars per barrel.
According to Befman: “The EIA’s weekly oil situation report in the US showed that commercial crude oil inventories continued to rise in the week ending 1/20/2023, but at a relatively low rate compared to the large increases in the previous two weeks. The continued increase in inventories resulted in that the commercial oil inventory in the US remains at a level about 3% higher than the average level during this period in the last five years. In our estimation, these are factors of a temporary and transitory nature, and with the continued recovery of refining activity, the abnormal increase in inventory is expected to be curbed.
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The utilization rates of the refineries in the USA continue to recover at a slow pace from the effect of the cold wave in the USA, and they increased from 85.3% to 86.1%. In our estimation, the recovery of refining activity is expected to continue in the coming weeks and return to around 90%, with the recovery of fuel demand.
The stock of fuel (gasoline) in the USA continued to rise in the week ending 1/20/2023, against the background of the continued recovery of refining activity and alongside the low demand of households for fuel.
On the other hand, the stock of distillates continued to decrease and the stock level shrank by approximately 0.5 million barrels. As a result, the level of the distillate inventory reached a level approximately 8% lower than the level it was in the corresponding period last year.
The gap between the average level during this period in the last five years and the current distillate stock level remains at a high level of 20%. This high gap is unusual and it reflects the tight market situation due to the decrease in supply. The number of active oil rigs in the US decreased in January, after it was on an upward trend from the last quarter of 2020 which stopped in December 2022.
This, against the backdrop of the downward trend in oil prices, which raises concerns among investors regarding the viability of long-term investments, since oil production using oil shale is more expensive than “traditional” production methods. Some OPEC+ members expect the group to keep production quotas unchanged at a meeting to be held in early February, amid the slowdown in global economic activity.
Apparently, this assessment of keeping production quotas unchanged relies on Russia’s oil production to decrease along with less damage to Europe’s economic activity. If it turns out later that this scenario will not materialize, then the group may cut the production quotas at their meeting in March.
Iran’s oil exports have increased recently, with most of the exports apparently being purchased by China, and at the same time there was a slowdown in the third week of January in Russian oil exports. Fuel demand in the US has remained low since the beginning of 2023, despite the slow recovery during the month of January. Fuel demand continued to rise in the week ending 1/20/2023 but at a slow pace and remained around the level of 8.1 million barrels per day.
The impact of the tightening of the distillate market, as a result of the low inventory levels, was greater and the prices of gasoline and diesel continued to rise. This increase is in contrast to the decrease that occurred in recent weeks, and the gap between its current price and the price of diesel in the same period last year increased slightly to about 22%.
The demand for jet fuel decreased slightly to about 1.4 million barrels per day, but they remained in the range they have been in for the past few months. In our estimation, the demand recovery is expected to continue moderately, against the background of the expected easing of disruptions caused by the weather
China and India are the biggest buyers of Russian oil and distillates. After the European Union imposed sanctions on Russian oil, through the enforcement of a “ceiling price” policy. In February, the G7 countries are expected to impose sanctions on Russia and impose a “ceiling price” limit on Russian distillates as well, with an emphasis on fuel, diesel and fuel oil. As a result, it is expected that China and India will increase their purchases of distillates from Russia.”
In addition, Befman referred to the natural gas market: “The price of natural gas in the US continued to decrease last week and reached about 2.94 dollars per MMBTU. This, against the background of market assessments of a decrease in external demand. This decrease occurred alongside the drop in the price of natural gas in the European market (TTF) to approximately 54 euros per MWh, which occurred despite the continued decline in natural gas reserves in Germany and was supported by the increase in liquefied natural gas infrastructure in Germany, which expands the capacity to use liquefied natural gas.
In our estimation, the price of European natural gas is expected to remain around the current range soon, as long as the winter in Europe remains mild, and in the medium term there may be a further decrease in its price after a stable and permanent solution is found to the energy crisis in the European market. natural gas in the European and American market and weather fluctuations may lead to a renewed increase in the price of European natural gas (TTF).
The risk of a shortage in case of a return of a harsher than expected winter still exists in the market and as a result the price of European natural gas is expected to remain very volatile. However, the maintenance of a high level of inventory in the reservoirs and the LNG ships that are abundant around Europe may continue to be a moderating and stabilizing factor.”
Finally, Befman brought the mid-term outlook: “The global oil supply is expected to decrease in the first half of 2023, following the expected decrease in OPEC+ oil output, partly due to the expected decrease in Russia’s oil output, and this despite the expectation of a certain increase in US oil output.” B.
At the same time, it seems that the process of releasing crude oil from the strategic reserve of the USA has ended, and the USA has even announced its intention to replenish the inventory, which creates a “floor for the price”. In the second half of 2023. This increase in activity is expected to support China’s demand for oil. Overall, the price per barrel of Brent is expected to decrease during 2023, to a level of around 80-85 dollars per barrel.