Significant Second Quarter Surplus Weighs on Crude Prices

With a war in central Europe involving a major oil producer, continued strains on the global supply chain and historic inflation, one might expect crude oil prices to be higher than today’s $110 for ICE Brent. Furthermore, the expected decline in Russian crude oil supplies given the EU’s ban on oil imports might lead one to expect rising prices ahead. The fundamentals, however, are pointing to something quite different.  

In its monthly Global Crude Oil Outlook, ESAI Energy projects a 4.0 million b/d global oil (crude, products, NGLs) surplus in the second quarter. This surplus includes the SPR drawdown, which factors in as an 800,000 b/d supply replacement, meaning it is represented in the global oil balance as a reduction in demand. There is some debate on the magnitude of the drop in Chinese demand. ESAI Energy has projected a 2.4 million b/d drop whereas the IEA is reporting only a 1.0 million b/d drop in the second quarter. According to ESAI Energy President, Sarah Emerson, “we expect the IEA estimate to be revised upward.” She continued, “This is a significant drop in demand that will result in higher Chinese product exports or weaker Chinese crude demand going forward.”

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