Column: Seasonal weakness could deprive oil prices of some warmth

LONDON, Nov 11 (Reuters) – According to the latest forecasts from the US Energy Information Administration, oil prices are expected to stabilize around current levels in the coming months and then decline gradually over the course of next year.

The EIA expects production increases from OPEC+, US shale companies and other oil producers to outpace slowing consumption growth, pushing prices down (Short-Term Energy Outlook, EIA, Nov. 9).

Prices for first-month Brent futures are expected to fall below $70 a barrel by the end of 2022, broadly in line with the current streak of futures prices, bringing them close to the long-term inflation-adjusted average.

The EIA predicts that global liquid production will increase by nearly 2.5 million barrels per day between December 2021 and December 2022, while consumption will increase by just 0.9 million barrels per day.

As a result, the agency expects production and consumption to be in equilibrium in the first quarter of 2022, with surpluses 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 sheet in the first and second quarters is expected to remain slightly tighter than usual for the time of year, before loosening up slightly than usual in the third and fourth quarters.

But all projected balances are well within historical seasonal ranges, are easily absorbed by the market and are unlikely to disrupt prices much.

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SEASON

Nevertheless, there are reasons to believe that last year’s sharp rise in oil prices could at least hold a pause in the next 3-6 months.

Hedge funds and other investment managers have already built above-average exposure to crude oil and other petroleum futures and options contracts.

From a positioning perspective, the balance of risks has therefore shifted downward, with liquidation rather than further accumulation being more likely.

Crucially, the oil market is headed for the weaker part of the year.

Over the past three decades, Brent futures prices have generally been strongest compared to other months in September and weakest in March.

The probability of a sharp rise in the oil price is about the same throughout the year, but the chance of a sharp fall in the short term is greatest between December and April.

The result is an upward bias in prices reaching a peak in September and a downward bias in prices reaching a peak in March.

The market is now entering the six-month period where seasonal declines are more likely, which could take some of the heat out of prices.

If this pattern repeats, which is by no means certain, political sensitivity to rising oil prices could ease for a few months before escalating again by mid-2022.

John Kemp is a Reuters market analyst. The opinions expressed are his own.

Related columns:

– Would the sale of oil reserves in the US have a significant impact on prices? (Reuters, Nov. 9) read more

– Depleted US oil supplies make the market vulnerable to shocks (Reuters, Nov. 4) read more

– US oil futures rally fueled by Cushing stock pulls (Reuters, Oct. 28) read more

– OPEC+ comfortable with rising price trend (Reuters, Oct. 26) read more

Editing by Jan Harvey

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