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Macro sentiment and physical oil markets point to near-term oversupply

Macro sentiment in many parts of the world has been weak, keeping prices lower with prices trading near a 2-month low.

Dubai crude oil swap time spreads continued to decline, reflecting weak demand fundamentals in several parts of the world.

With recessionary indicators, sentiment was weak. Spreads in the Brent complex also weakened as the level of offset fell, indicating ample near-term oil supply in European markets.

With the EU’s December 5 deadline to ban Russian oil imports and the imposition of price caps by the G7, refiners in Europe appear to have stockpiled significant quantities of oil in advance, which increases pressure on physical oil cargo differentials.

Oil demand is exploding

OPEC has revised down forecasts for global oil demand growth in 2022 for the fifth time since April and also cut expectations for next year due to the global economic scenario and impending slowdown.

Oil demand for 2022 is now expected to increase by 2.55 million bpd, 0.1 million bpd lower than last month’s forecast.

Estimates for 2023 have also been reduced by 0.1 million bpd to a currently forecast growth of 2.24 million bpd. OPEC+ is expected to meet on December 4 to decide on the production action plan.

According to reports, Chinese and Indian refiners are reluctant to book shipments of Russian oil and prefer to wait and watch the G7 price cap effect.

If refiners avoided shipments, it would ensure stable demand for barrels from the Middle East, which have faced competition from Russian volumes and had to price accordingly.

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Chinese domestic demand is expected to continue to fall as the surge in Covid-19 cases in recent days has brought back some restrictions that had just been eased.

With higher export quotas available to refiners, this is likely to continue to push the country’s stronger diesel exports. Refining throughputs will likely be sustained to maintain distillate production.

Weekly crude oil exports (week ending November 20) from the Middle East and North Africa rose to 129.2 million barrels and 16.7 million barrels respectively. A diesel tanker, the “Pacific Zircon”, was hit by a drone attack off the coast of Oman last week, again raising the threat of attacks on infrastructure.

With global oil reserve capacity limited to the region, any attack on infrastructure could further limit supply.

(Reporting by Sudharsan Sarathy; editing by Seban Scaria)

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