It is hard to pin down what went through the minds of oil market players when they decided to get rid of length with such ferocity that not only outright prices dropped significantly but the structures of the five major futures contracts also weakened considerably. After all, there is a disturbing conflict taking place in the proximity of the most salient oil producing region of the world. It would be a convenient explanation to conclude that fears of entrenched inflation and high borrowing costs have re-surfaced as core US producer prices, according to the Labor Department, rose 2.7% versus a forecast of 2.3%. Or the latest Fed minutes that showed an ambivalent view about the path the US economy might take – potentially including further rate hikes. Whilst such a move obviously cannot be ruled out the equity markets remained calm, the dollar broadly unchanged and bond yields drifted further lower.

Another possible trigger for the sell-off might have been the Saudi pledge in which the cabinet re-affirmed its efforts to stabilize the oil market. The problem with that is that the definition of a stable market, from any producer’s point of view, is certainly not increased production. It is particularly valid now that the US-Saudi rapprochement, which would have seen improving Saudi-Israeli ties and potentially rising oil production, as reported by the Wall Street Journal last weekend, is off the table, until after the current conflict is resolved or at least mitigated, something that does not seem imminent.

The updated monthly report on the global oil balance from the EIA is another ostensibly credible candidate for the weakness, sellers, however, started to make their presence from the early hours of yesterday’s trading. Maybe the answer lies in the fact that Iran has not been explicitly implicated in the present Israeli-Palestine conflict, therefore supply disruptions are not anticipated. This statement is currently factually correct but given the almost unprecedented and geopolitically complex hostile standoff in the Middle East, any further downside potential will plausibly remain limited.

The post-settlement bout of selling, which spills over to this morning, on the other hand, is completely warranted. The ongoing US maintenance works make refiners’ thirst for crude oil severely diminished. Thus, the API saw crude oil inventories build 12.9 million bbls. Gasoline demand is still sluggish as reflected in the 3.6 million bbls swelling in its stockpiles, but distillate inventories drew 3.5 million bbls.

Loosening 4Q Oil Balance

Supply-demand estimates can diverge significantly, therefore it is a challenging task to assess whether any given view is price supportive or not, however, the changes from the previous forecasts can provide a rough idea how the perspective have changed over the preceding month. The latest Short-Term Energy Outlook from the EIA released yesterday afternoon foreshadows a loosening fundamental backdrop for the last quarter of the year. Global oil demand was revised downwards by 130,000 bpd, a clear sign that economic headwinds are still causing turbulence and hamper oil consumption. At the same time non-OPEC supply was upgraded by 160,000 bpd resulting in a 240,000 bpd downward revision in the call on OPEC. Demand for the organization’s oil was seen at 27.72 mbpd in September whilst the latest findings put it at 27.48 mbpd.

Since OPEC production was left broadly unchanged global oil inventories are expected to decline by only 50,000 bpd leading to OECD commercial oil inventories bidding farewell to 2023 at around 2.792 billion bbls. It is 18 million bbls higher than estimated last month. The main message is that the protracted fight against inflation is not as effective as hoped for and despite OPEC’s best efforts stock depletion will slow as 2023 draws to an end.

The good news is that 2024 will look brighter than the current year. The EIA seemingly agrees with OPEC and not with the IEA in that the growth in 2024 global oil demand will exceed that of non-OPEC supply. Although it was cut by 50,000 bpd from 1.36 mbpd to 1.31 mbpd, it is still higher than the 1.05 mbpd increase in non-OPEC supply. Consequently, OPEC call will rise from 27.60 mbpd in 2023 to 27.83 in 2024. And here comes the real surprise: the statistical arm of the Department of Energy now anticipates a significantly reduced OPEC production throughout next year. In the September issue they predicted an output level of 28.29 mbpd from the alliance. This figure was amended to 27.78 mbpd. The 550,000 bpd supply surplus for the whole of next year has been turned into a deficit of 60,000 bpd, a swing of more than 600,000 bpd. No surprise then that industrial stockpiles in the richer part of the world are now seen to finish next year at 2.784 billion bbls, a cut of 60 million bbls on the month. The continuous effort from OPEC to keep the market tight is especially conspicuous in the first quarter of next year when the organization is estimated to pump 27.65 mbpd, 580,000 bpd less than projected in September. Perhaps the most relevant piece of information for any oil trader is the Brent is now expected to average at $95/bbl in 2024, which is $7/bbl higher than last month’s price forecast and around $14/bbl higher than the current curve.

The other interesting aspect, and a welcome development, of the report is that for the first time the EIA published OPEC+ production data throughout the reporting period. Collective production from the 10 OPEC member together with their non-OPEC peers will decline from 38.19mbpd in 2023 to 37.84 mbpd in 2024, chiefly driven by the sizeable downward revision in OPEC output.

As for the US the two most intriguing data sets are crude oil production and gasoline demand. Despite the EIA having recently cut monthly shale oil production estimates it increased the 2023 figure from 12.78 mbpd to 12.92 mbpd month-on-month. On the other hand, it revised its 2024 forecast from 13.16 mbpd to 13.09 mbpd, which would still be the highest annual average. 4Q domestic gasoline demand was downgraded from 8.75 mbpd to 8.70 mbpd and for 2024 the consumption of this motor fuel is set to be 8.69 mbpd, 40,000 bpd lower than expected in September.

Overnight Pricing