Crude prices underpinned by firm fundamentals, broader energy rally – Vitol

London (Quantum Commodity Intelligence) – The recent oil price strength is a function of the broader-based energy rally but underpinned by both current and longer-term fundamentals, Vitol's head of Asia, Mike Muller, told a webinar hosted by Gulf Intelligence Sunday

"There is a buzz… it does look the bulls currently have it," said Muller, referring to Brent prices above $70/b.

However, firm crude prices are reflecting the overall energy complex, particularly strong gas prices over the summer. "If you look at the energy complex itself, the LNG (Asian) benchmark JKM has been sitting at or around $11/mmBtu, which is a hefty winter-type price," said Muller, noting that current LNG demand into China was more consistent with winter levels.

'… even coal is trading at around $125/metric ton in Newcastle," referencing the Australian benchmark, which in May moved above $100/mt for the first time in two years.

The Vitol executive also noted reports of power rationing in parts of China.

Rebalancing

Muller said that market rebalancing was also supporting prices, with the gradual increase in supplies helping to bring down the inventory glut that built up during the pandemic.  

'The global stock draw is continuing unabated despite the demand setbacks that we are seeing,' referencing the slowdown from India. 'Consequently, the market will expect OPEC to have done its job and return inventories to a baseline level,' said the veteran oil trader, referencing 2019 stock levels.

Muller further added, "the market has confidence that the Saudis will stick to their successful formula in leading by example, and return their extra 1 million bpd back into the market in a responsible way,"

Asked about shale production, Muller said, "US production is still nearly 2 million bpd off the pre-pandemic high, and I see no way that the US is going to catch up in the next 6 to 9 months because it is just not possible to mobilize the shale sector that quickly," noting that the rig count was still way down on pre-pandemic levels.

Muller, previously global head of crude oil trading for Shell, noted that oil majors were resetting priorities, which was likely to have an impact on shale production moving forward.

"Shell has shed four refineries in the US in the space of a year, and you are seeing everywhere that the energy transition is taking hold and people are thinking twice before sinking money into (shale) projects."