Global oil markets are reacting to news from Eastern Europe that Russia has retracted troops from the Ukrainian border. However, price relief may be short-lived as bullish factors remain.
In a classic knee-jerk reaction, oil markets are losing ground on news of a Russian de-escalation on the Ukrainian border.
Russia’s claim of partially withdrawing troops from the Ukrainian border has slightly loosened the stranglehold the tensions have over the market, but the threat to supply persists, especially considering Russia will continue large-scale military maneuvers in the region.
Although the geopolitical risk in the region has temporarily receded, Russia’s crude exports up to 700,000 bpd could still be at stake in the event of a war with Ukraine.
As global demand goes from strength to strength and supply remains under threat, the market signals remain strongly bullish in the coming days despite today’s retracement.
Russian de-escalation notwithstanding, the fundamental signals for the global oil market remain overwhelmingly bullish.
OECD commercial crude and liquid inventories continue their almost uninterrupted descent over the past 18 months and now sit at the lowest levels since November 2014.
Brent backwardation – the difference between future contracts prices for prompt delivery vs. prices for deliveries further into the future – is also at the highest level in a decade, signaling a potential additional tightening in oil supply soon.
The steepening backwardation could also be accelerated by speculative money being attracted to crude as an asset that offers strongly positive and increasingly roll-yields.
The current supply and demand fundamentals are fully compatible with Brent pricing close to $100 per barrel, and any supply disruption or demand surprise could push the benchmark past that landmark threshold.
The IEA recently raised their historical demand numbers significantly, and although most adjustments relate to NGLs, which mainly come from the natural gas stream, this global oil demand upward reset helps explain the very tight global inventory outlook the market is facing.
Oil demand could surge if pandemic restrictions and concerns recede faster than initially expected, but the signals are still unclear.
Global aviation staged a substantial uptick in the past week, which could signal further strength in the coming weeks.
The supply side of the equation remains highly uncertain, with OPEC+ inability and unwillingness to close the current gap with demand and some of the Russian crude exports being potentially at risk in case of a conflict with Ukraine.
US light-tight oil production continues to increase, but the pace is insufficient to compensate for OPEC and Russian shortfalls.