If those with bullish propensity were looking for a gentle nudge or excuse to liquidate some of their lengths built up in the last 2-3 months, the inspiration came from a very disappointing set of US stock data. All the major categories recorded weighty builds. Crude oil stocks rose by 4 million bbls, gasoline inventories fattened by 5.6 million bbls and distillate stockpiles grew by 3.9 million bbls. On balance, commercial oil stocks advanced 10 million bbls.

The crude build was the function of a huge jump in imports and a sizeable fall in exports in addition to production reaching 12.9 mbpd. The net result was a 2.6 mbpd swelling in net imports week-on-week. On products the 0.6% increase in refinery utilization, possibly due to the upcoming turnarounds, is one of the plausible explanations for rising stockpiles. The other one is the 1 mbpd weekly plunge in implied gasoline demand just a week after the curtain “officially” came down on the 2023 US driving season.

The fact that this genuinely bearish stock report only led to a brief temptation to sell speaks volume and underlines the market mentality. The two major crude oil contracts settled only a few points lower, RBOB covered impressively from the day’s low, and Heating Oil and Gasoil reversed direction and rallied hard after plummeting on Tuesday. Confident performances from the major product contracts imply that the current strength has not fully run its course yet.

The eagerly awaited US CPI release did nothing to make the afternoon blip a protracted move south. Retail pump prices drove the August US consumer price index 3.7% over last year’s level after a year-on-year increase of 3.2% in July. The coveted 2% inflation target has drifted a little but further away, but it was not all gloom. Core inflation, which ignores food and energy prices, moderated and the annual increase cooled from 4.7% to 4.2% on the month. Because of reduced pressure on core prices and despite the resilience of oil, the Fed will plausibly stay put at its meeting next week. Today the market will have to deal with the ECB’s interest rate decision but once it is out of the way without drastically rocking the boat, focus will shift back to the tightening of the global oil balance, which will remain the dominant price driver for the remainder of the year.
 

GMT +1	Country	Today’s data	Expectation
13.15	Euro zone	ECB Interest Rate Decision	4.25%
13.30	US	PPI MoM August	0.4%
13.30	US	Initial Jobless Claims Sep/09	225,000

 

Common Ground is 4Q Stock Daw and Nothing Else

We noted in yesterday’s report the almost unconditional bullishness of OPEC, which runs contrary to the view of the EIA. The group of major oil exporters forecasts a massive plunge in global and OECD oil inventories in the last quarter of 2023, but the EIA expects a significantly blander stock depletion. The IEA, which released its updated findings yesterday is bang in the middle.

Before thoroughly digesting the numbers, it is worth reading through the Feature Article of this month’s Oil Market Report. In that the agency points out that Russia’s invasion of Ukraine upended the status quo in the oil market, which led to the first truly global energy crisis. It then goes on to say that Russia’s membership of the OPEC+ group has made efforts to sail through turbulent times more difficult. The agency also sees the Saudi-Russian partnership in managing the supply side of the oil equation a ‘formidable challenge for oil markets’. What it means is that the extension of the collective cut of 1.3 mbpd in production/exports from Saudi Arabia and Russia until the end of the year comes at a time when the global oil balance is tight, inventories are falling, and refiners are finding it difficult to satisfy increased demand. The latter is embodied the IEA’s latest Global Refining Margins Indicator. It sees considerable jumps literally in every type of refining margin all around the world. Arbitrarily choosing two, the NW European medium sour cracking margin rose from $16/bbl in July to $25.35/bbl in August and the Singapore light sweet cracking differential widened from $5.99/bbl to $11.93/bbl month-on-month.

The IEA observes production constraints by the OPEC+ alliance to the extent of 2.5 mbpd in total since the beginning of 2023. Although these cuts have been partially offset by non-OPEC+ (chiefly US & Brazil) production growth, meaningful supply deficit is anticipated from this month onwards, sending oil inventories tumbling and risking another spike in price volatility. This not-so-implicit criticism of the producer group is the latest chapter in the war of words that considerably soured the relationship between the energy watchdog of consuming nations and the most influential oil producers. The individual goals of the two blocs are neatly conspicuous in the diverging forecasts.

First, demand. There is a broad consensus on 2023 demand growth: it is 2.44 mbpd, according to OPEC, the IEA puts it at 2.20 mbpd. Absolute numbers are 102.30 mbpd and 101.80 mbpd, relatively close to one another. Differences in revisions, however, are striking. OPEC upgraded it by 60,000 bpd, the IEA cut it by 350,000 bpd. The gap widens to 680,000 bpd for 4Q – 103.18 mbpd, OPEC says, 102.50 mbpd, the IEA reckons. The difference is more tangible on the non-OPEC supply front. The gap for the whole year is comparatively narrow, it is 150,000 bpd but for 4Q there is a clear difference of opinions. OPEC predicts non-OPEC supply reach 67.04 mbpd and the IEA 68.00 mpbd.

Because of these differing views, the call on OPEC’s oil for October-December is also debated. OPEC puts it at 30.71 mbpd and the IEA would counter with an estimate of 28.90. Accordingly, the daily stock depletion will be 3.18 mbpd assuming an OPEC output of 27.53 mbpd, OPEC would argue or 1.37 mbpd, the advocates of the IEA forecasts claim. The contrast is significant enough to make any price forecast uncertain. The common ground between the two estimates is that inventories WILL deplete, as a result prices SHOULD be supported causing renewed inflationary headache for central bankers and investors alike. The gulf in the assessment of 2024 is even wider, something that we are planning to discuss in Monday’s note.

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