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Jan von Gerich, Analyst at Nordea Markets, suggests that headwinds for higher oil prices have already started to emerge, but given the tightened physical balance and the uncertain supply conditions, it will probably take some more time for these headwinds to bring prices lower.

Key Quotes

“The global economy has been losing momentum, as has been illustrated e.g. by the global manufacturing PMI. Also the higher oil prices are already taking their toll on oil demand growth. The International Energy Agency (IEA) revised their demand growth forecast lower last week in response to higher prices.”

“US shale production still has room to respond. While US production is already growing at a record pace, it has not been able to stop the rise in prices. Infrastructure constraints (e.g. pipeline capacity) have acted as a brake to further production growth, and it will take some time to tackle these issues.”

“In addition, even if geopolitical tensions persist, at least there should be more certainty about their consequences, while Saudi Arabia has promised to ensure adequate supply. After all, much higher prices are not in the interest of the Saudis either, as higher prices dampen demand and accelerate the search for alternatives.”

“As a result, prices will probably peak towards the autumn, and fall back again towards the end of the year.”

“Financial markets see the increase in prices as a temporary phenomenon. In fact, while the futures curve has been in backwardation (lower prices longer out) for quite some time, the slope has steepened, as short-term prices have risen more than long-term ones.”