Oil: Deficits support higher prices – TD Securities

TD Securities’ Ryan McKay argues that Crude Oil is far from oversupplied, with high-frequency global and Chinese balances still pointing to tightness. McKay expects ongoing market deficits, inventory drawdowns and the rebuilding of buffers to keep prices elevated, projecting a recovery toward $90/bbl and possible extension toward $100/bbl as structural tightness persists.

Structural tightness and deficit outlook

"Our high-frequency estimates of global and Chinese supply-demand balances, along with Middle Eastern production, continue to point to market tightness despite increased flows through the Strait of Hormuz. Ongoing market deficits, inventory drawdowns, and longer-term rebuilding of market buffers should see prices recover toward $90/bbl, with potential for a move toward $100/bbl."

"Flows through the Strait of Hormuz have increased notably since the signing of the MoU [Memorandum of Understanding], as stranded tankers have quickly rushed for the exit. This has seen a flush of supply in the market that is being mistaken for a supply glut. However, looking forward, as the market becomes reliant on production increases rather than floating storage, flows are likely to tighten again."

"All pre-war slack has been removed from the system, and every conceivable and unexpected lever of flexibility has been pulled to avoid catastrophe. The market has priced this avoidance as a combination of relief and optimism, while also placing an overexaggerated focus on the near-term temporary supply and the start of a supply recovery. While the right tail outcomes for crude pricing have thinned, prices should still settle higher than pre-war levels, given the fundamental damage that has taken place."

"Based on this production recovery profile, we continue to expect market deficits of roughly 2.5-3m b/d in crude and at least 1-2m b/d in products through July and August, before the market moves into a more balanced state in September. We expect these deficits to persist despite higher flows, as a slowdown in SPR releases and lower U.S. exports driven by domestic inventory tightness offset part of the increase in supply."

"In this sense, a system that remains structurally stretched relative to recent history will warrant structurally higher prices."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)