COLUMN-Seasonal weakness could take some heat out of oil prices: Kemp

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(John Kemp is a Businesshala Market Analyst. Views expressed are his own)

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LONDON, Nov 11 (Businesshala) – Oil prices are expected to stabilize near current levels over the next few months, then decline progressively during the next year, according to the latest forecast from the US Energy Information Administration.

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The EIA expects OPEC+ output increases, US shale firms and other oil producers to reverse the slowing growth in consumption, which will help drive prices down (“Short-Term Energy Outlook”, EIA, November 9).

Front-month Brent futures prices are projected to be below $70 a barrel by the end of 2022, roughly in line with the current bar for futures prices, placing them close to the long-term inflation-adjusted average.

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The EIA estimates that global liquid production will increase by about 2.5 million barrels per day (bpd) between December 2021 and December 2022, while consumption will increase by only 0.9 million bpd.

As a result, the agency expects production and consumption to be balanced in the first quarter of 2022, moving into a surplus of 0.7 million bpd in the second, 0.5 million in the third and 0.9 million in the fourth.

The production-consumption balance in the first and second quarters is projected to be slightly tighter than normal for the time of year, before turning slightly below normal in the third and fourth quarters.

But all anticipated balances are within historical seasonal ranges, are easily absorbed by the market, and are not likely to upset prices much (tmsnrt.rs/3HgmO8K,

Season

Still, there are reasons to think that the strong rally in oil prices over the past year could lead to at least one pause in the next 3-6 months.

Hedge funds and other investment managers have already accumulated above-average positions in crude oil and other petroleum futures and options contracts.

From a position perspective, the balance of risk has therefore shifted to the downside, with liquidations more likely rather than more accumulation.

Importantly, the oil market is heading towards a weaker part of the year.

Over the past three decades, Brent futures prices have been the strongest in September and the weakest in March.

The potential for a sharp rise in oil prices is roughly equivalent throughout the year, but the potential for a significant short-term decline is greatest between December and April.

This results in an upward trend in prices reaching a maximum in September and a downward bias in prices reaching a maximum in March.

The market is now moving into a six-month period where there is a higher chance of a seasonal downtrend, which could take some of the heat away from prices.

If this pattern repeats, which is not for certain, political sensitivity about rising oil prices could subside for a few months before rising again in mid-2022.

Related columns:

Will the sale of US oil reserves affect prices more? (Businesshala, 9 November)

– Depleted US oil reserves left the market in the grip of shock (Businesshala, 4 November).

– Rally in US oil futures driven by Cushing stock draw (Businesshala, October 28)

– OPEC+ comfortable with rising price trends (Businesshala, 26 October) (Editing by Jan Harvey)

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