Oil prices resilient on energy transitioning and despite softer Chinese demand

[MongiIG]

Oil prices showing a relative short-term outperformance despite IEA suggestion of waning demand in 2022.

Source: Bloomberg

 

Shares Commodities Brent Crude International Energy Agency OECD China

 Shaun Murison | Senior Market Analyst, Johannesburg | Publication date: Thursday 15 September 2022 

Oil resilient over the near-term

After dipping to their worst levels in the beginning of September 2022 since January this year, oil prices have started a modest rebound from oversold territory. Interestingly enough, oil has shown a relative resilience this week to asset classes such as equities and metals which succumb to fears of tighter monetary policy amidst higher inflation and the prospect of slowing / contracting economic growth.

Oil prices finding some support from power generation transitioning

The commodity is however finding some support from higher energy prices in its fossil fuel peers namely coal and natural gas. These higher energy prices are supporting some of the demand side factors for oil which is seeing an increased need for power/electricity generation, most notably in Europe and the Middle East. Exorbitant cost pertaining to oil and gas find an increased appetite for oil at present.

IEA suggests the level of oil demand to wane

A recent report from the International Energy Agency (IEA), while noting increased demand for the commodity in power generation, expects the growth in demand for oil to slow into the remainder of the year. Amongst the catalysts for waning demand growth are the pandemic disrupted Chinese economy (through ongoing lockdown implementation) and slowdown in Organisation for Economic Co-operation and Development (OECD) countries.

The IEA has in turn lowered its forecast for demand growth in 2022 by 110,000 barrels a day to two million barrels per day, while keeping its growth forecast for the commodity in 2023 at 2.1m barrels per day.

WTI crude vs Brent crude

Source: IG Charts

The above chart shows a WTI (US) crude oil chart and spread comparison indication against Brent crude. The spread indicator trading below the red shaded area on the chart shows that the price of WTI has seen a sharp underperformance (more than two standard deviations) against its Brent crude peer. This is only the second time this has occurred in the last two and a half years.

We maintain our view that over the medium term we could see a normalization of the spread relationship between these two securities with WTI now starting to outperform Brent.

An outperformance could occur in one of three ways:

1. The price of WTI rising while the price of Brent falls
2. The price of WTI rising faster than the price of Brent rising
3. The price of WTI falling slower than the price of Brent falling