The message from China is simple but loud and reverberates throughout the globe. The country keeps struggling to incentivize spending and sluggish aggregate demand ensured that industrial producer prices fell by a forecast-beating 1.8% last month whilst consumer prices inflated 0.6%, below analysts’ expectations. Overnight data was equally disheartening: August exports exceeded expectation, imports underwhelmed, and the purchase of foreign crude oil dropped 7% on the year. Although oil produced a recovery from the day’s lows due to plausibly temporary factors, this advance was lukewarm at best. Oil producers in the Gulf of Mexico started to evacuate staff and curbed drilling as a precautionary measure ahead of the arrival of Tropical Storm Francine. Its impact is ambiguous at this stage. It is, however, worth pointing out that the English alphabet will be comfortably long enough to accommodate all the named storms this year since halfway through the hurricane season only the letter F is being spelt out when originally 18 turbulent tempests were predicted. The force majeure declared by Libya’s NOC on numerous Es Sider cargoes was also seen as price-supportive, especially for WTI as the US benchmark closely matches Libyan crude oil in quality. Front WTI structure has been bolstered but the protracted upside impact of the Libyan production outages remains dubious.

Focus will soon shift to the US CPI report due out tomorrow together with the ECB interest rate decision on Thursday. Headline US inflation is estimated to have moderated in August, but the core value is to remain unchanged. Given Friday’s somewhat lacklustre nonfarm payroll data bets on a 0.5% Fed rate cut next week have been scaled back whilst the ECB is widely anticipated to implement its next round of reduction in borrowing costs. The interest rate gap between the dollar and the euro, therefore, is unlikely to thin. This, in turn, supports the greenback, which serves as an additional brake on any attempt to push oil prices north. As usual, there is a myriad of factors to contemplate, ponder and assess, and the current snapshot does not indicate an imminent change in mood.

Unloved Oil

Risk assets in general and oil in particular have fallen out of favour of investors. What has been on display since mid-April is a continuous downtrend, which, from the technical perspective, is defined as consecutive lower highs and lower lows. Rallies triggered by headlines and the sporadically auspicious financial or oil data have proven elusive and bears always hastily re-asserted their authority. The European crude oil benchmark has shed nearly quarter of its value on a continuation basis from peak to bottom between April 12 and September 6. Since financial players exert their influence most keenly on outright prices, the bleak sentiment is embodied in the weekly reviews of net speculative length (NSL).

Looking at the changes in NSL from April to the last reporting period, which covers the week ending September 3 there are some shocking readings to digest. Starting with the big picture, there has been a withdrawal of $59 billion from the oil futures and options market in the last 21 weeks. Combined assets under management (AUM) stood at $66 billion in April in the five major oil contracts. It compares with $6 billion last week, a decline of 91%. AUM fell 67% in WTI, 89% in Brent and 87% in RBOB. Heating Oil and Gasoil speculators have been net short since June and August respectively. 

In the two major crude oil contracts combined NSL stood at 129 million bbls last week, well under the 522 million bbls registered in April. It is the second-lowest value on record. It is significantly under the all-time high of 1.12 billion bbls observed at the beginning of 2018 when the OPEC+ market management strategy was effective. Brent suffered a more severe exodus as NSL in the European crude marker fell from 335 million bbls to 42 billion bbls (-88%), whilst in WTI the plunge was a ‘mere’ 60%, from 218 million bbls to 87 million bbls. It implies the ‘international’ nature of the sell-off precipitated by economic concerns and ample supply.

The compositions of the NSL both in WTI and Brent are equally intriguing and confirm the above view. The 131 million bbls retreat in WTI NSL saw gross length falling by 97 billion bbls and gross short positions increasing by 34 million bbls. The long/short ratio decreased from 4.1 to 1.8. The same indicator in Brent plummeted from 5.1 to 1.3 as bulls reduced their gross exposure by 231 million bbls whilst bears increased theirs by 62 million bbls. The nearly $5/bbl premium Brent commanded over WTI in the middle of April on a front-month basis narrowed to $3.41/bbl by last Tuesday.

Product contracts play a less prominent role in the portfolio of money managers as reflected in their comparatively modest volumes. Yet, it is conspicuous that their NSLs corroborate the underlying trend. In Heat and Gasoil net short positions are anything but a rarity given the seasonal nature of the distillate market, nonetheless, it is imperative to note that Heating Oil with its NSL at -23 million bbls has not been this unwanted since the COVID-19 health crisis. Gasoil attractiveness at -3.8 million tonnes reached a 9-year trough last week whilst RBOB NSL, albeit bounced impressively off its nadir 5 weeks ago, is still trimmed by seasonal as well as historical measures.

No doubt, the serious retreat in thirst for oil will trigger occasional flows back into this asset class, especially if justified and supported by fundamental developments, such as continuous Libyan supply disruptions, geopolitical tension, or rate cuts by central banks. Yet, as the forward curves on WTI and Brent reveal, rallies could easily turn out brief affairs. They suggest a gradual loosening of the oil balance. The M1/M7 WTI backwardation narrowed from $6/bbl mid-July to $2.32 by yesterday’s settlement. The same spread on Brent plummeted from $4.31/bbl to $1.31/bbl. The value of the monthly backwardation has eroded considerably for most of 2025 and has been reduced to under 15-10 cents/bbl. The structure confirms what analysts are prognosticating for next year – a potentially oversupplied market. Today’s EIA and OPEC reports and Thursday’s IEA update will be eagerly scrutinized and if the currently bleak demand outlook is mirrored in them, confidence will not improve. Moreover, should OPEC+ decide to add oil back to the market any time next year then the narrow backwardation presently exhibited will be viewed as an unjustifiably optimistic perspective on 2025.

Overnight Pricing