Lone Bearish Forecast Causes Big Oil Price Drop, Despite Widespread Undersupply Concerns

JPMorgan worries that Russian sanctions could lead to $185 oil: File Image/Pixabay

A day after crude traders were fortified by bullish signs stemming from robust demand and tight global supplies, a solitary bearish development on Tuesday – the International Monetary Fund slashing its global growth forecast – caused oil prices to reverse course and plummet by over $5 for each key benchmark.

West Texas Intermediate settled down $5.65 at $102.56 per barrel and Brent settled down $5.91 at $107.25 after the IMF downgraded its world growth forecast by the most since the early months of the pandemic and projected even faster inflation.

Adding to traders' fears was China announcing that its Covid zero tolerance lockdowns will continue, which so far has translated into slowing economic activity (although experts stress that fuel demand in that country will pick up as manufacturing plants prepare to reopen in Shanghai).

All but ignored was the previous session's cause for oil prices rising: Libya's crude output has reportedly fallen to about 800,000 barrels per day (bpd) as protests that closed the Sharara field in the west of the country spread.

Only ANZ remarked on the significance of the outage, stating that "Libya's oil output disruption added a further bullish tinge to an already undersupplied market ... This has outweighed some of the rising demand concerns due to lockdowns in China."

More evidence that the market is undersupplied was Russia's invasion of Ukraine, which is causing diesel-hungry buyers from around the world to snap up massive volumes of fuel from the U.S. Gulf Coast, despite high prices.

Waterborne diesel exports from the Gulf Coast rose to 1.3 million bpd so far this month, on track to reach the highest monthly level since January 2016, according to Vortexa.

The Energy Information Administration believes U.S. diesel exports in total will average 1.3 million bpd this summer, a 38 percent increase from last summer.

Appropriately, some analysts on Tuesday chose to downplay the IMF forecast and focused instead on current fundamentals, with high demand remaining a cause for concern:  Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said, "It's a fairly supplied market for now and one which doesn't look like we're in crisis mode at this point, but one where we do need to get more production."

JPMorgan was even more concerned about shortages due to the possible European Union ban on Russian oil: analyst Natasha Kaneva on Tuesday worried that a full and immediate ban would displace over 4 million bpd and propel Brent prices to $185 per barrel.

She added that a phased in approach over four months would not significantly disturb prices, and Stephen Innes, managing partner at SPI Asset Management, remarked that while the EU is likely to adopt a phased in approach, "It will be challenging for US oil to back-fill the EU deficit."