Once upon a time, the oil market was highly seasonal, with the second and fourth quarters having the weakest demand of the year, and the second quarter in particular, when refineries were under maintenance ahead of the summer driving season. The market has generally seen demand for crude oil fall sharply. As shown in the figure below, US sales of middle distillates (diesel fuel and heating oil) were peaking in mid-winter at about 1.5 mb/d above summer lows. Although monthly data for Europe and Japan are not readily available from the 1970s, both combined probably experienced something in the order of 1 mb/d between trough and peak.

The decline in seasonality and the ongoing recovery in global oil demand from pandemic depressed levels means that there will not be a sharp drop in demand for OPEC oil. The figure below shows the IEA’s forecast for OPEC oil demand (plus inventory change) and indicates that the usual second quarter pressure on OPEC is unlikely to occur this year.

That said, a number of developments could see the Q2 market weaken dramatically, especially from the current high (near $100 Brent). First, but probably less likely, the easing of pandemic-related restrictions could see a new wave of covid depress economic activity and demand. A new variant is possible, but the probability is unclear. In any case, the possibility of additional stockpiling of 0.5 to 1 mb/d would not create major pressure on prices, given that stocks are depleted, around 500 million barrels. A drop in demand of 1 mb/d for a quarter would reduce pressure on prices but would not cause a crash.

The virtual certainty, however, is that the US Federal Reserve will raise interest rates, by at least ¼ and potentially ½ percent, which could trigger a stock market sell-off and some economic weakness. A collapse in equity prices and oil demand seems unlikely, but at the very least it will have a side effect on oil prices, pushing them down slightly. (In fact, rising interest rates may already be priced into the market, but overtaken by the Ukrainian situation.)

But, to paraphrase the Bible, geopolitics gives and geopolitics takes away. The whole Russian-Ukrainian situation is unclear, but it seems highly unlikely that there will be military action underway as late as April. If there is no interruption in Russian oil exports, as seems almost certain, and the front lines in Ukraine stabilize (Putin announces “MISSION ACCOMPLISHED” but probably from behind his desk instead of the bridge of ‘an aircraft carrier.) Easily $10 off the current price is due to the Ukrainian situation, and maybe $20. And even if there is no clear resolution to the conflict, with no impact on oil supply, crisis fatigue will set in and traders will sell.

Finally, Geopolitics II, the Ayatollah strikes back. The ongoing JCPOA negotiations with Iran are lost in the Daily News cycle, where it increasingly looks like there will be a new deal, possibly before the end of February (as some have speculated). ), but almost certainly by the end of March. New oil exports from Iran – which says it can quickly add 1.3 mb/d to production and has 80 million barrels in floating storage – will not appear immediately, but there will be a timetable, formally or de facto, for their return and this will reduce market concerns about a potential tightening later this year. So an immediate drop of maybe $5 a barrel when a deal is announced, but forecasters will likely cut their H2 price expectations by $10, all else being equal.

Given my spotty track record of forecasting short-term oil prices (longer term is better), you might think I’d be reluctant to commit to a new print forecast, but only if you don’t. don’t know. (Either I’m being shameless, or I think one more miss won’t hurt my reputation.) My guess is we’ll see Brent around $80 in the second quarter and between $70 and $75 in the second half of this year. This assumes no major new wave of covid, an increase in interest rates from the Fed, the stability of the Ukrainian situation by the end of March and a new JCPOA agreement with Iran. As they say, “Watch this space.”