Although there is no singular oil current affairs influence that will see Brent prices scuttle to $60/barrel and below, there is however, a convergence of market forces that put paid to any ideas of a reclamation of $80/barrel. This is why oil prices had struggled all last week and staying with Brent, ended nearly $3/barrel lower. Picking any of the debilitating guards against rallies as the most important is subjective, it is the influence in the round that is all-important, and different drivers will jockey to the front of bearish considerations as and when appropriate.
Try as we might, there is no relent in having to list China as a major reason for diminishing demand. Even the usually ever-optimistic OPEC Monthly Oil Market Report conceded the issues plaguing China’s economy and downgraded its 2024 oil demand growth from 580kbpd to 450kbpd. Last week, and part of the triumvirate of monthly reports, the IEA continued in cautionary tone as next year its projected 1mbpd surplus of global oil production remains viable due largely to China’s inability to counter its stagnating economy. The inflation readings of last week stand as a measure to the lack of immediate growth, both in consumer spending and in industrial activity. The October CPI reading at 0.3% was not only lower than the previous month’s 0.4%, but it was also the shortest reading for the last 4 months. If domestic consumers are not buying, then manufacturing will likely suffer and is shown in the decrease of PPI, which in October at -2.9% is lower than September’s -2.8% and constitutes 25-consecutive months of producer deflation. There are reductions in the prices of materials, mining and importantly for oil markets the cost of processing, which on the face of it would seem good but is underwritten by poor demand. Bloomberg calculates in January – October period of 2024, apparent oil demand (oil processing volume and net import of refined fuels) stands at 14mbpd which is down -4.03%. With refined fuel exports also caged due to lack of global demand, refiners are faced with testing margins adding to a circular reduction in all kinds of demand.

OPEC+ are getting to the sweet spot in what will be a rather awkward period of review in front of the 1, December meeting. Having delayed the re-introduction of part of the voluntary cuts due again to China and probably the prolific production of oil in the Americas, the group are now faced with a credibility issue. Prevarication and another ‘kicking of the can down’ the one-month street, will lead to not only international scorn but some from within its own ranks. Discipline has always been the bane of effectiveness in keeping oil from the market, therefore, without a decisive new plan, frustration will ensue, and oil markets will again see the serial cheaters of Russia, Iraq and Kazakhstan do their worst. Libya may be exempt from OPEC production limits, but the recent political shenanigans that pulled the North African country’s output down to 750kbpd was a massive boon for OPEC. With force majeures once again put back in the box, production returns to around 1.2mbpd and massively unwelcome in the OPEC plan to influence price from supply. We continue in the opinion that OPEC must be bold and change its attitude by phasing out all voluntary cuts, take the resultant fall in prices on the chin and thereby be able to run an equalised price campaign against its competitors. Until that happens its relevance and credibility will continue to leak as if it were being transported by Keystone.

Lastly, and by no means the least is the many-faceted influence of the new era of Donald Trump as the US President. The US election, and particularly a Trump win, was and is the biggest event of the oil year and although the word ‘mercurial’ is overused, it is harder to find a more suitable labelling of the media star as he is adorned with the robes of office. ‘Drill, baby drill’, is all the rage and gives an easy headline to the President-Elect’s attitude to the oil industry. The EIA in its Short-Term Energy Outlook last week forecasted US Crude production to increase to 13.53mbpd, which is a breathtaking amount of oil and Mr Trump is hardly the man to exercise caution. Frankly, the only thing that will stop US oil hitting more overseas markets will be profits for shareholders. US producers are not beyond taking a leaf from the OPEC playbook by leaving oil in the ground if it lacks a destination. Geopolitically, the Donald is expected to take a hardline view on Iran and most expect an enforcement of sanctions that have been conveniently nursed under the incumbent US administration. However, even if the US can stymie the 1.5mbpd or Iranian oil hitting the waves, it will take time to enforce, and the world’s alternative supply will fill the gap. Even if it cannot, OPEC’s spare capacity stands at up to 5mbpd and will more than compensate even if sanctions are applied on Venezuela’s 400kbpd exports too.

Looking at limiting a countries ability to trade, one cannot dismiss the weighty issue of a tariff war. There is not an economist, anywhere, adhering to the belief that any such initial blighting of free trade by the US can only lead for tit-for-tat retaliatory actions and with it a significantly restricted global trading arena, scuppering demand in all shapes and forms. Last week, Jerome Powell, the FED Chair resumed his ‘wait and see’ stance, which is a nod in caution to any Trump effect. Tariffs in and out of the US is inflationary. So is the ghastly prospect of millions of immigrants being deported, reducing the workforce and causing an incredible surge in workplace wages as businesses try to fill employment holes. The Federal Reserve will have little option other than slowing the pace of interest rate cuts. A divergence will be witnessed as Europe and China fight to instil confidence in their flagging economies by cutting interest rates and Japan’s base rate will remain fettered. The US Dollar has already embarked on a rally with the above in mind, but if all the inflationary effects come to fruition and others not yet considered, the greenback will make for numbers that crush commodities, investment and growth from here to Timbuktu.
No markets are future proof, price prediction comes with a barrel of ‘ifs’, today we have just taken a bearish swipe at oil prices because at present some of the influences are conveniently lining up. However, we do hold with the opinion that oil price rallies from here, barring something disastrous in the Middle East, will be short-lived.
 

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