Brent crude oil prices are expected to resume range-bound trading at about $111/bbl in the tail end of the second quarter, stated London based Barclays in its recent market analysis.This will coincide with global oil demand surpassing 90 mb/d for the first time in history, with non-OECD demand exceeding OECD demand. In terms of demand growth, Barclays expects upside surprises in the Atlantic (Latin America) and the Pacific (smaller non-OECD Asia Pacific countries).
China is expected to grow a moderate 5%. This positive turnaround is already largely reflected in this week’s OPEC monthly oil market report with the organisation lifting the call on its own crude by 100 thousand b/d to 29.8 mb/d, in line with Barclays expectations.
Brent remained above $104/bbl last week with a slight pick-up in intraday volatility. The bank maintains it's view that there is not yet enough momentum in the benchmark to power a complete retracement to the familiar range around $111/bbl.
While the macro-environment has turned positive with upside surprises in data seen this week from Germany, Australia and the US, this is likely to only support prices at current levels at best, rather than propel a complete upward retracement. This is because, on the physical markets, demand for prompt cargoes of light grade crude continues to be muted.
Refinery margins remain under pressure with European refineries that emerge from turnaround season widely expected to reduce utilisation rates. Simple refineries in North West Europe (especially in the UK) have already started cutting runs. Margins in the Mediterranean are worse and run cuts are expected there as well.
Although margins have bounced back slightly over the last three days, the return of refineries in Asia over June is something that is looked out for in the direction of margins.
Although refineries in the Pacific are largely still under maintenance, there is also a likelihood that they could possibly delay their return or come online and operate at lower utilisation rates.
Until then, while run cuts, especially in north west Europe and the Mediterranean, are imminent and expected to limit the appetite for prompt crude.
The bank expects a large volume of run cuts to follow through globally given that:
--There is still some flexibility with regards to adjusting crude slates and processing sour grades to produce more fuel oil. This remains an attractive option to exercise given relatively attractive margins for producing residuals, compared with processing light sweet crude and producing distillates, where margins remain depressed.
--Refineries must fulfil term obligations for refined products delivery, especially given that seasonal summer requirements are only about to begin.
Source: Barclays