Last week, the prices of the oil complex battled through achieving new year-to-date lows to ultimately record something of a mixed week. WTI remains the stalwart of the complex as it held above April 2023 numbers, but the rest of its compatriots trawled the depths into the pandemic numbers of 2021, with much of the disappointment still levelled at distillate contracts. At the close of play, and on the week, the M1 closes for each registered the following: WTI +$0.98/barrel (+1.45%), Brent +$0.55/barrel (+0.77%), Heating Oil -3.7c/gallon (-1.45%), RBOB +3.42c/gallon (+1.80%) and Gasoil -$1.00/tonne (-0.15%). The beginning of the week was plagued by continued references to the lack of refiner margin for processors being paired with the constant nag on how the Chinese economy was faring due to the disinflation shown by CPI and PPI. Adding to the discomfiture of the market were some bearish takes on conversations in and around the AAPEC meeting where the great and the good of the oil fraternity gathered. There seemed no end of banks and analysts willing to downgrade predictions of future pricing and with S&P Global predicting an increase in OPEC production for 2025, it came as little surprise that net longs had decreased in WTI and Brent futures to their lowest levels since records began in 2011. Such was the vein of bearish attitude running through the market’s sentiment that in some ways the would-be effects of Hurricane Francine, while taken seriously by operators that stood in its path in terms of safety, was underestimated in price sensitivity as seen by how the products futures prices continued in making new lows on Wednesday even after WTI led crude prices higher.

The economic fate of the United States stands all-important in a world bereft of other sources of inspiration. What befalls and beguiles markets within Uncle Sam’s remit therefore must intrigue us all. In terms of the weather, one wonders if complacency had set into oil thinking. After all, there have only been 6 named storms this year with just 4 making American landfall. Given that we were promised numbers in this season reaching in the mid-teens by the various predictors of such things, it is rather a paltry return against the Met Office’s 1991-2020 average of 14. Where the realisation of vulnerability strikes deepest is how the US is running such low crude oil stocks. The year-on-year measure of -1.449 million barrels might bring a metaphorical sniff, but against the 5-year average stocks are -19,591 million barrels or -4.5%. Where this becomes even more interesting is how crude production is up 400kbpd (+3.1%) on the year and up 1.640mbpd (+14.1%) when measured on the same 5-year mean. Homing in on nearer-term data, the 4-week average for production is 13.325mbpd, exports are 3.694mbpd and imports 2.774mbpd, with implied demand running at 16.803mbpd. The mathematics of US inventory is subject to seasonal vagaries, corrective processes and SPR. Yet, it is obvious that feedstock levels are running at a low ebb and whether this is deliberate due to costs, or some other factor is in fact irrelevant when a hurricane comes to call and stops 40% of production when there is not much in the tank. Indeed, TankWatch have recently been reporting steady declines in the storage hub at Cushing, Oklahoma with the American Petroleum Institute, Global Spatial Insight and the US Energy Information Agency all giving similar readings of 25-million barrels. The intricacies and understanding of Cushing and associated storage are hard-won, but there can be little doubt that with such a low-level reading, the shouts of ‘bottoming’ will be heard and the tolerance to supply disruptions in the United States is very much diminished. Such realisation was the mainstay of a turn in price fortunes.

Similarly, there came something of turnaround in the carriage of the wider suite. Everything that could be said about interest rates was said and markets hunkered down into what seemed to be an approaching period of conservatism from central banks. The European Central Bank duly obliged with a 25-basis point cut that brought little less than a yawn from investors who found themselves more concerned with continued leading statements from the Bank of Japan on how it was considering quantitative tightening through a curb in bond buying and an increase in interest rates. Contributing to the state of investment reluctance and downward pressure was the much-awaited publication of the US CPI. The year-on-year and month-on-month increases of 2.5% and 0.2% were deemed passive, and being the slowest increase for nearly four years, not many held hope for a super-charged US FED rate cut. With the ‘blackout’ in place for FED members in front of this week’s decision, it appeared all but assured that a 25-basis point cut would ensue. However, after opinion pieces from the Wall St Journal and the Financial Times that a shift in focus to the US job market pricing once again started to increase for a more aggressive cut. Accelerating the speculation was intervention from the former President of the NY FED who opined that rates were currently 150 to 200-basis points above neutrality and a strong case for a 50-basis point cut is easily made. On Thursday the CME FedWatch pricing for such a cut stood at 14%, it is now 55% and rising. Bourses, bonds and the usual suspects have acted accordingly, but such news is bullish at last for commodities. Interest rates have been restrictive for commodity finance practices, such a cut is so very welcome in riskier assets and importantly the double whammy of how the US Dollar will be taken down a peg or two after its recent lofty standing.

So, is this the bottom, are we perpetuating a new run to the highs? Well, no, there are too many factors running against the oil market. However, the short-term change in fortunes of last week, worrying low crude stocks in the US and the longer-term environment of lower interest rates serve to remind that oil prices are never one-way traffic. Sentiment is against oil at present, as evidenced in commitment of traders. In ICE Brent futures short positions now outnumber long ones by over 12k lots and according to Bloomberg data, the most bearish on record in data going back to January 2011, with the short-only figure the highest in 14 weeks. Returning to last week the IEA and OPEC in their monthly reports for once, in varying degrees, agreed that oil demand in the future looked increasingly problematic with much of the worry in forecast emanating from the state of China. Those concerns are once again with merit as data over the weekend continued to point to an economy in decline. In August the House Price Index registered -5.3%, accelerating a fall from last month’s -4.9%; Fixed Asset Investment was +3.4% below the +3.5% forecast; Industrial Production was +4.5% against the 4.8% call; Retail Sales was 2.1% versus a 2.5% call and Foreign Direct Investment (FDI) contracted by 31.5%, falling from July’s -29.6%. It is probably fortunate that there are many holidays observed in APAC, including China today, and reaction is muted with futures prices more concerned and held sway by the follow-on bid from Wall Street’s growing anticipation of a double decker FED rate cut.

Oil bears will also point to the effects of ‘Francine’ being transitory, the FED decision still being a coin toss and that OPEC+ await, ever eager to at last reverse some of their voluntary cuts. There is also the glaringly obvious issue with distillates. Our relationship with the various components of oil’s arguably most important sub-sector offers time and again opportunities to mull over. To do so now will not do it justice. But it is needless to say that as Heating Oil, Diesel and their like make up 45% of modern refinery processing, any slump in the industrial fuel’s demand, which at present looks likely, does give bears a decent enough stick to brow beat those that believe the current events of oil are enough to signal a turn in prices. Whichever side of the bias-fence one might sit, there is enough in current affairs to keep both interested. However, such interest may not manifest itself into actual position taking, the 25 or 50-basis points decision by the FED on Wednesday is going to rock markets which in the meantime gives bulls and bears an opportunity to sharpen their horns and claws.
 

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