Bearish Cocktail Hits Oil Prices

A bearish cocktail of market events is really hitting prices hard this Friday, causing a steep drop that strips oil of a good part of its recent gains.

That’s what Rystad Energy’s head of oil markets, Bjornar Tonhaugen, said in report sent to Rigzone today, adding that prices had been “inflated” recently.

“[Prices] had reached so high - under a pandemic status quo - … that when the bearish news hit, they hit hard,” Tonhaugen stated.

“It’s not only that traders look to avert risk in the end of the week, it is also refinery outages that strip demand, a window to bring Iran and the U.S. back to the negotiating table, and indications that OPEC+ is planning to increase its supply from April,” Tonhaugen added.

The Rystad Energy representative noted that oil production in Texas has seen significant volumes cut over the last few days but highlighted that the net effect is “surprisingly bearish”.

“Refinery shutdowns are larger volumetrically than oil supply losses, at least for some days … Production can fall as it may, but if refineries cut their processing capacity to an even larger extent, the imbalance naturally pushes prices lower,” Tonhaugen said.

The Rystad Energy head also stated that the White House opened the door for the start of a diplomatic roadmap with Iran. Tonhaugen highlighted that the U.S. said it would accept an invitation from the European Union for a P5+1 meeting to discuss a diplomatic roadmap on Iran’s nuclear program.

“Iran is the single-largest upside supply risk for the oil market, after the OPEC+ spare capacity in terms of volumes. The 1.7 million barrels per day of shut-in capacity can likely come onstream in a matter of 6-9 months post the lifting of sanctions, if there is enough demand in the market,” Tonhaugen said.

“Iran is still a very important factor for oil markets, not only for the oil price formation but also because of the dilemma it would cause within OPEC, as the group already produces below what most of its members would ideally like to do,” he added.

Drawing attention to emerging reports that OPEC+ aims to open its production taps a bit more from April, Tonhaugen said this was an “expected development and justified by oil prices”.

“For how long could the alliance – which has taken most of the market burden since the pandemic started – show restraint when everyone else benefits from the price levels it helped create?” Tonhaugen said.

“OPEC members aim, and rightly so, to start enjoying the fruit of their efforts to bring healthy price levels back to the market, faster than even the most optimistic market observers would expect,” he added.

To contact the author, email andreas.exarheas@rigzone.com