The oil market remains a bystander in the Trump-phoria that sweeps across investment markets elsewhere. Therefore, yesterday, the OPEC Monthly Oil Market Report was very much awaited, but its delivery held few surprises. The cartel downgraded its oil demand growth for 2024 from 1.93mbpd to 1.82mbpd and in a similar quantity, its 2025 forecast from 1.64mbpd to 1.54mbpd. Much of the trimming is inspired by China. The report showed a reduction in growth from 580kbpd to 450kbpd and targeted a lack of Diesel use. We await the US EIA Short Term Energy Outlook today and the IEA report tomorrow and will endeavour a compare and contrast if there are standout anomalies other than the usual doom from the IEA and overconfidence of OPEC. The muted response of prices tells all on how much influence the report had yesterday, and across the complex there was hardly a change on the day, although new monthly lows were achieved in all the major futures contracts bar Gasoil. The eventual recovery in prices to unchanged was inspired by a pushback from Israeli officials against a ceasefire in Lebanon. With API and EIA/DOE weekly inventory reports delayed, today's action is set to be contained, and rallies are becoming guarded against by not just fears of oversupply. 

The idea of a tax cutting, free spending new US administration is bringing thoughts of delays in interest rate cuts from the Federal Reserve which will coincide with a more doveish European Central Bank and Bank of Japan. This then sees the US Dollar continue to rally hard with the US Dollar Index (DXY) above 106.00 and only just shy of the year-to-date high. These thoughts have given a pause for thought in equities too. The concern is reflected in the CME FedWatch tool that has seen pricing for a 25-basis point cut in December fall to 62% when only a month ago it priced at 84%. The US CPI reading today will then have an eagerly awaiting investment community and any untoward mark will see an outsized move.

Undecided but Progressively Sceptical

Undeniably, the earth-shattering event of recent times was the US election with Donald Trump winning his second term in office after a 4-year hiatus. In the light of the resounding victory equities received a major boost and so did cryptocurrencies. Ideas and pledges about deregulation are seen as auspicious developments for the above-mentioned asset classes, at least this is what the initial enthusiasm insinuates. As stocks rallied, bond yields declined although in case economic policies prove inflationary the trends observed last week could easily reverse after the honeymoon period is over.

The reaction in the oil market, on the other hand, did not suggest that a disruptive and transactional candidate received the majority of the votes. Last Wednesday’s sell-off precipitated by the dollar strength quickly dissipated and from Thursday onwards it was seemingly ‘business-as-usual’ for our market whilst investors elsewhere keep a close eye on the rhetoric and the formation of the new administration. It looks as though that the Trump government’s oil-friendly agenda did not ruffle feathers and there is a growing consensus that whatever support will be provided by Donald Trump and his acolytes that US supply market will be ultimately left to its own device and production levels will be determined by economics and not so much by intervention.

This is, of course, not to say that the underlying backdrop is encouraging, and oil will rally from here – quite the opposite. Looking at the recent changes in assorted spreads (a simplified view of the trade) and at net speculative length (NSL) (how money managers view the oil market), it is tempting to come to the conclusion that the mood remains one that can be characterized by discernible lack of upside conviction. Notwithstanding OPEC’s best efforts to tighten the market as much as reasonably possible by continuing to delay the lifting of self-imposed output constraints, the market is reluctant to ascend.

The backwardation both on WTI and Brent is slowly, but gradually and relentlessly eroding in value. The front spreads are now printing 15 cents/bbl and 25 cents/bbl, well below the $1/bbl premium the first month commanded over the second at the end of August. The M1/M7 spreads of the two pivotal crude oil benchmarks are also cheapening. On WTI it has fallen from over $3/bbl to $0.86/bbl and on Brent from $2.5/bbl to $0.89/bbl in the past 1 ½ months. Whenever OPEC decides to start re-claiming market share by reversing voluntary cuts, flipping into contango cannot be ruled out.

The structure of the crude oil contracts is a reliable gauge of refinery demand for their most important feedstock. The change in crack spread or refining margin values is an unmistakable indicator of consumer or end-user demand. The picture on that front is equally disheartening. Both RBOB and Heat cracks at $14/bbl and $23.6/bbl are under the year-ago levels of $16/bbl and $42/bbl. Consequently, the 3-2-1 crack also shows a deficit to November 2023. Current levels are matching the pre-pandemic prices when crude oil was trading more than $10/bbl lower than currently.

Financial investors broadly share the bleak sentiment palpable in the physical market. Net short positions displayed in Brent two months ago are still fresh in memory and although net speculative length is now positive again, at 126 million bbls it is considerably below the year’s peak of 334 million bbls. WTI NSL almost doubled to 93 million bbls on the week, which is also significantly less than the annual high of 239 million bbls. During the latest reporting period ending November 5 there was $16 billion invested in the two crude oil futures and options contracts. Once again, it is historically depressed. Given that prices are below last Tuesday’s levels, further deterioration is anticipated come Friday. Although we asserted above that the election results are not having a profound impact on the formation of oil prices, if Trump’s economic policies will further enhance short-term equity prospects investors will see better returns there, thus withdraw additional funds from oil, particularly if they deem it justified by worsening supply-demand considerations.
 

Overnight Pricing