The oil bull rally finally lost steam. Having threatened to touch the magical $100/bbl and go beyond – just two weeks ago, the decline has been quite something. Recall that Brent crude had been gaining for three straight months – showing no consideration for growing calls of slowdown in demand especially from Europe, as all eyes and ears were focuses on Opec+ alliance. The likes of JP Morgan and Citi joined the chorus and went as far ahead as calling for $150/bbl by 1Q2024.
The US dollar has been gaining strength and the Fed’s hawkish stance furthers the agenda. The seasonal slump in US fuel demand is now gaining more attention, especially as the US EIA released its latest report on inventories. The report reads an interesting story. The crude inventories continue to slide – for the fourth straight week – which should generally be viewed as a signal for bulls to go on. But the crude inventory slide is perhaps best explained by the ever-growing stocks of refined products, particularly gasoline –which showed a remarkable jump in the latest reading – the biggest buildup in over two years.
Why are the US refineries pumping more gasoline when demand is low one may ask. The answer lies in the spreads on offer – that are near historical highs. The crack at refineries is worth around $45/bbl today – compared to single digit or at times even negative price less than a decade ago. The crude buildup, although slow, has shown signs of encouragement at the all-important Cushing facility –a fact that investors have taken a lot of heart from and something that proved instrumental in spoiling the party for Opec+ meeting announcement.
Russia and Saudi Arabia have expectedly announced to maintain the production cut of 1.3 million barrels a day for November and December. That much was pretty much priced-inin the rally of three months. There were no expectations of the alliance announcing more production cuts yet – and that is where the demand worries finally got more weight.
That said, Saudi Arabia continues to maintain that the market is far from being balanced and that it will do whatever it takes to fund its ambitious Vision 2030 – that essentially needs oil prices clear of $80/bbl at most times. Who is to say the Saudi led alliance cannot call an emergency Opec+ meeting, should the bears gain momentum? There is enough recent precedence suggesting that this is not entirely beyond question. For now, oil under $85/bbl for the first time in over three months offers a good window of opportunity for net importing countries, more so for the ones who are also facing high inflation and/or dollar shortage.
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