Daily Oil Fundamentals

Bear Cameo

Oil prices have been on a relentless retreat over the past three days. Technical supports have been broken under and the prospects are looking increasingly grim. This view was confirmed by the Chinese inflation data released overnight. The June CPI rose 0.2% year-on-year, below the May value and forecast. Yet should yesterday’s major news be the yardstick of the immediate future then there is a strong case to make that the bottom will be reached imminently – US stock data allowing. (The API showed draws in crude and gasoline stocks, but distillate inventories rose.) 

In his written testimony to Congress, Fed chair Jerome Powell emphasized the rise in consumer prices is being successfully brought under control, but ‘more good data’ is required to start lowering borrowing costs. As vague as it sounds the market literally rules out a July rate cut but the CME’s FedWatch tool sees a 70% probability for a September one. Thursday’s June inflation report is forecast to show a rise of 3.4% in headline reading, unchanged from May but a fall of 0.2% to 3.1% in the core figure.

The updated global oil balance from the EIA released yesterday afternoon also looks sanguine. The call on DoC oil for the second half of the year has been upgraded by around 120,000 bpd due to the equivalent downward revision in non-DoC supply. The absolute figure is 43.12 mbpd. Global oil inventories are to decrease at a rate of 710,000 bpd in 2H thus Brent is now expected to average $89/bbl in the coming six months. The 1H mean was $83.48/bbl, the present 2H curve is around $82/bbl.

The Bull and the Swan

Following the uptrend that took the price of front-month Brent from the low of $76.76/bbl on June 4 to the summit of $87.95/bbl on July 5 the market is taking a breather. It is too early to say that this move lower is just a healthy but inevitable consolidation and the ascent will be re-instated shortly or under the present circumstances the underlying fundamental outlook does not justify further upside potential. Glancing through the wires it becomes perceptible that the latest bout of selling can be attributed to two major factors: the potential revival of a truce talks between Israel and Hamas and Hurricane Beryl. Historical evidence suggests that any development that goes against the current trend has a more profound impact on prices than those that are aligned with the mood. In other words, a bearish development will be viewed as a much more irresistible temptation to sell in a rising market than in a falling one and vice versa.

It is consequently worth having an exhaustive look at how the two above-mentioned factors might influence the formation of oil prices in the foreseeable future keeping in mind that due to the financialization of markets overreaction to fresh developments can be a frequent phenomenon. To begin with the current state of the Israel-Palestine conflict, it is reasonable to conclude that the news of resuscitated attempts to negotiate a truce and solve the ongoing hostage crisis logically led to some kind of long-liquidation. At the end of last week confidence and hopes of a ‘significant opening’ to finalize a deal to halt, at least temporarily, the conflict in Gaza were growing. Its price impact, however, will plausibly be brief for two reasons. Firstly, the cynic would say that we have been here before only to no avail and on cue Israel’s Prime Minister, Benjamin Netanyahu has re-iterated his demand that any talks must allow his country to continue fighting against Hamas. Everyone with unquestionable conscience condemns the terrorist attack on Israel on October 7 and does not impugn Israel’s inalienable right to defend itself but this attitude is akin to the behaviour of a bull in a china store, does nothing to show the slightest inclination of settling the conflict and makes a mockery of the expressions of ‘truce’ or ‘peace’. Secondly, oil production or supply has not been materially impacted in the Middle East although doubtless some length had been built up as a hedge against the small chance of the region going up in flames. Part of these positions was liquidated in recent days, and the minimal risk premium was further reduced. It is, nonetheless, unlikely to exert protracted downside price pressure even if some kind of agreement is to be impending.

The US hurricane season is a trickier issue to scrutinize. It could have a bearish or a bullish impact on prices. Depending on the path of the devastation it might impact crude oil or products, thus precipitating wild and wide swings the value of crack spreads. What was curious about Hurricane Beryl, or better say about the reaction to it, was that it had a negative impact on WTI and its structure more conspicuously than on refined products. Postmortem insinuates that because of port closures around Houston, as a precautionary measure, the market might have taken the view that crude oil exports will be adversely affected this week and consequently the EIA’s Weekly Petroleum Status Report published next week, which covers the 5-day period ending July 12 might register a rather surprising increase in crude oil inventories. The National Oceanic and Atmospheric Administration foresees an 85% chance of an above-normal season, which lasts from June 1 to November 30, and predicts a range of 17 to 25 total named storms. The US hurricane season is truly a black swan event with unforeseen consequences as it is impossible to nail down in advance whether the destruction will take place on the demand or supply side of the equation. Whilst Hurricane Beryl ostensibly had a negative impact on oil prices, her successors might wreak havoc in the refinery sector or around offshore platforms devastating product or crude oil supply pushing prices significantly higher. By any stretch of imagination, the repercussions could be very painful but short-lived. 

Overnight Pricing

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10 Jul 2024