A sense of calm returned to the energy complex yesterday after Monday’s tumble. Bottom pickers entered the fray as prices overshot to the downside and in doing so helped both crude markers edge higher. Brent tacked on 73 cts/bbl to finish at $69.35 while WTI gained 85 cts/bbl to settle at $67.20/bbl. Even so, the backdrop remains uneasy given fears that the surge in Delta variant Covid-19 cases is taking its toll on demand. Goldman Sachs reduced its forecast for Brent crude oil to $75/bbl for 3Q21, $5/bbl lower than its previous estimate. The bank now predicts a third-quarter deficit of 1.5 mbpd versus 1.9 mbpd previously. Simply put, even the most fervent oil bulls are fretting over the near-term demand uncertainties caused by the pandemic.

Elsewhere, the relief rally spilled over onto Wall Street. Leading US equity gauges rebounded after suffering their worst day in several months. That being said, investors continued to seek out the safety of US government bonds. The yield on 10-Year Treasuries dropped below 1.15% yesterday for the first time since February. This suggests that market players are still concerned about a virus-induced slowdown of the economic recovery.

All in all, anxiety surrounding growth and the pandemic has not lifted. The risk-asset complex will therefore continue to be vulnerable to further Covid-related selloffs. In the meantime, oil prices are back under pressure this morning amid fears of swelling US oil stocks. Overnight, the API reported an 806,000 bbl gain in US crude stocks last week. If confirmed later today by official data, it would end a run of eight consecutive weekly draws. All the while, gasoline stocks showed a build of 3.3 million bbls while distillate fuel inventories drew by 1.23 million bbls.

Russian fatigue

Mention the word Russia and thoughts of a gung-ho oil producer springs to mind. Time and again the non-OPEC heavyweight has displayed its readiness to open the taps. It has repeatedly pushed OPEC+ to increase production as oil prices rallied. When this failed, it managed to secure individual concessions from supply cuts. Moscow’s seemingly eternal desire to boost output is motivated by two arguments. First, there is some fear that high-cost producers such as US shale could be incentivized to increase production as prices recover. Second, not all Russian energy companies are supportive of the continued Russian Energy Ministry’s cooperation with OPEC. As prices rise, the majority of Russian energy companies have become increasingly unwilling to hold back production.

So, it comes as a surprise that Russia has recently displayed restraint in its production growth. Under a previous deal agreed by the OPEC+ group of leading oil producers, Russia’s production quota was allowed to rise by 144,000 bpd between May and July. However, Russia reduced oil production in June after keeping it almost flat in May. The country’s oil and condensate output eased to 10.42 mbpd in June from 10.45 mbpd in May, the second straight month of decline and the lowest since March. What’s more, this lacklustre showing in growth prospects is alive and well this month. Russian oil and gas condensate output has barely increased to 10.44 mbpd on July 1-19, sources told Reuters yesterday.

Simply put, Russia has not been able to keep pace with any easing of OPEC+ production cuts. This may be due to technical issues some domestic oil producers are experiencing with output at some old and inefficient fields. Oil wells within these so-called brownfields have in some cases been permanently damaged from record production cuts over the past year. Another reason why Russia has not been in any rush to boost output is lower breakeven points. According to the IMF, Russia’s breakeven price is $46/bbl while Saudi’s is $68/bbl. As prices hovered comfortably above $70/bbl, Russia could afford to adopt a wait-and-see approach.

Going forward, Russia’s Deputy Prime Minister in charge of energy issues, Alexander Novak, is optimistic the country’s oil producers can boost their output following the OPEC+ decision to relax the nation’s production quota, starting next month. He claimed that Russia will start increasing oil output monthly by 100,000 bpd from this August and reach pre-crisis level of production in May 2022. What’s more, Novak hopes that the upward adjustment of the baseline will reinvigorate the flow of investments pouring into Russia’s oil and gas sector.

Yet even assuming Russia can meaningfully boost its output over the coming months, the demand for its crude might not be there. The rampaging Delta variant across the Asia-Pacific region is undermining oil demand among some of Russia’s biggest customers. Spot premiums for Russian ESPO crude, a China-focused grade, recently dropped to the lowest since April following muted demand. Meanwhile, upcoming loading programmes also point to subdued demand for Russia crude. Urals oil exports from Baltic ports were set at 0.7 million tonnes for August 1-5, unchanged from July 1-5. All the while, Siberian Light and Urals shipments from Novorossiisk were set at 0.24 million tonnes for August 1-5, down from 0.3 million tonnes on July 1-5.