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Oil (WTI-Oct Exp) surged almost top 91.35 Monday, at a 10-month high after an almost +30% rally since June’23 amid repeated extension of Saudi & Russian voluntary cuts and hopes of Chinese demand recovery. Also, OPEC, the US Energy Information Administration (EIA) and the International Energy Agency (IEA) all estimated larger market deficits in Q4CY23 as major producers kept global supplies tight, with global oil demand growth also expected to rise in the same period due to forthcoming holiday season. Fresh targeted Chinese fiscal/monetary stimulus and increased output from Chinese refiners driven by strong export margins also supported the demand outlook in the world’s top crude importer. Also, elevated demand from Indian refiners to serve both domestic and European markets is a boost, while increasing output by the U.S., Brazil, Mexico, Iran, and Iraq undercutting oil.
Last week, in its latest September report on the oil market, IEA said:
World oil demand remains on track to grow by 2.2 mb/d in 2023 to 101.8 mb/d, led by resurgent Chinese consumption, jet fuel, and petrochemical feedstocks. In 2024, naphtha and LPG/ethane, especially in China, will dominate an overall increase of a more modest 990 kb/d, to 102.8 mb/d, reflecting below-trend GDP growth and a structural decline in road transport fuel use in major markets.
The extension of output cuts by Saudi Arabia and Russia through year-end will lock in a substantial market deficit through 4Q23. So far this year, OPEC+ output has fallen by 2 mb/d with overall losses tempered by sharply higher Iranian flows. Non-OPEC+ supply rose by 1.9 mb/d to a record 50.5 mb/d by August. World supply in 2023 will rise by 1.5 mb/d, with the US, Iran, and Brazil as top sources of growth.
Russian oil export revenues surged by $1.8 bn to $17.1 bn in August, as higher prices more than offset lower shipments. Led by a decline in product shipments, total Russian oil exports eased by 150 kb/d last month, to 7.2 mb/d, 570 kb/d below a year ago. Shipments to China and India slumped to 3.9 mb/d from 4.7 mb/d in April and May but accounted for more than half the total volumes.
Refinery margins hit an eight-month high in August as refiners struggled to keep up with oil demand growth, especially for middle distillates. Product cracks and margins reached near-record levels due to unplanned outages, feedstock quality issues, supply chain bottlenecks, and low stocks. Global refinery runs are forecast to rise by 1.7 mb/d to 82.4 mb/d in 2023 and by 1.2 mb/d to 83.6 mb/d next year.
Global observed oil inventories plummeted by 76.3 mb to a 13-month low in August, led by a hefty decline in oil on water. Non-OECD oil stocks fell by 20.8 mb with the largest draw seen in China, while OECD inventories eased by 3.2 mb. In July, OECD industry stocks rose by 26.7 mb to 2 814 mb but remained 102.6 mb below their five-year average.
Oil prices traded in a narrow range throughout August, with North Sea Dated hovering around $85/bbl and price volatility at multi-year lows. Prices moved higher by end-month as fundamentals came to the fore once again and breached $90/bbl for the first time in 10 months after Saudi Arabia and Russia extended voluntary production cuts until the end of 2023.
Russia’s invasion of Ukraine in February 2022 upended oil and gas markets, creating the first truly global energy crisis amid the uneven economic recovery from the COVID-19 pandemic. Russia’s membership in the OPEC+ bloc has complicated efforts by the international community to navigate the crisis and address the major inflationary impacts of higher oil prices on economies around the world, especially in developing countries.
The Saudi-Russian alliance is proving a formidable challenge for oil markets. After oil prices traded in relative calm during August, with volatility at multi-year lows, the decision by Saudi Arabia and Russia in early September to extend output cuts of a combined 1.3 mb/d through year-end triggered a price spike in North Sea Dated above $90/bbl to a 10-month high. As forecast in this Report for some time, oil markets were already tightening and in August observed global inventories plunged by a sharp 76.3 mb, or 2.46 mb/d.
An expected rise in global oil demand of 1.5 mb/d in 2H23 over 1H23 levels will eclipse supply by 1.24 mb/d. Despite its difficult economic situation, China looks on track to account for 75% of the increase in world oil demand this year or 1.6 mb/d of the 2.2 mb/d total. But global demand growth is set to slow sharply to around 1 mb/d in 2024 as the recovery runs out of steam and with efficiency gains, EV penetration and working from home further suppress consumption.
Refiners are struggling to meet increased demand, especially for distillates. Surging product cracks and refinery margins near all-time highs have failed to spur a meaningful increase in throughputs. Sub-optimal crude allocations following embargoes on Russian crude and products and OPEC+ oil supply cuts have kept European and OECD Asian refinery runs well below year-earlier levels.
Output curbs by OPEC+ members of more than 2.5 mb/d since the start of 2023 have so far been offset by higher supplies from producers outside the alliance. Record US and Brazilian supply underpin a 1.9 mb/d increase in non-OPEC+ production from January to August, while Iran, still under sanctions, boosted output by around 600 kb/d.
But from September onwards, the loss of OPEC+ production, led by Saudi Arabia, will drive a significant supply shortfall through the fourth quarter. Unwinding cuts at the start of 2024 would shift the balance to a surplus. However, oil stocks will be at uncomfortably low levels, increasing the risk of another surge in volatility that would be in the interest of neither producers nor consumers, given the fragile economic environment.
Overall at a glance in August, the OPEC+ (including exempted members Mexico, Iran, Libya, and Venezuela) production increased by around +0.13 mbpd, despite the voluntary cut of -1.0 mbpd by Saudi Arabia. The U.S. is now in duet with Saudi Arabia to keep oil prices in control and even ready to allow Iran to export higher, while reluctant to refill the SPR shortage. As oil is Saudi Arabia’s main source of revenue, there is a constraint for it to cut further, although it may extend the present voluntary cut of -1.0 mbpd through 2024. But the U.S. may also counter this by higher production and supply from Iran, Iraq, Venezuela, UAE, and even Kuwait by influencing various policies.
Bottom line: Technical trading levels: Oil
Technically, whatever may be the narrative, oil now has to sustain over the 90.00 area for the next leg of rally towards 94.00/96.00-102.00/115.00-120; otherwise sustaining below 89.50, it may correct again towards 78.00/75.00-70.00/67.00 area in the coming days.
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