To paraphrase Churchill: We used to be undecided (about which way the market might go). Now we are not so sure. Equities did broadly well in August, the MSCI All-Country Index gained 1.62%. The S&P 500 Index jumped 2.28% higher but the tech-heavy Nasdaq struggled and settled only 0.65% up. It might be an ominous sign that the sector’s attraction is on the wane. A weaker dollar and retreating bond yields suggest that appetite for risk was healthy last month and economic prospects are sanguine. Oil, on the other hand, moved in its idiosyncratic way. Sometimes it followed equities and diverged from the dollar as any macroeconomic textbook would teach you, but at others, it separated from the herd of risk assets. Brent performed better than products as it closed 2.38% lower on the month as opposed to the negative return of 6.79% on Heating Oil and 10.89% on RBOB. Whether it is the evidence of an oversupplied physical market is open for debate.

There were two abrupt price movements last month that caught investors by surprise. The first one was the release of the preliminary estimate of US non-farm payrolls benchmark revision, which showed that much less job was added to the economy in the year throughout March 2024 than anticipated. The second occasion took place last Wednesday when reports about actual supply disruption in Libya went unnoticed and a reassuringly bullish weekly EIA oil statistics were swept under the carpet. The market quickly made amends in both cases, nonetheless, its vulnerability and unpredictability were on full display. Looking back at the major developments on the geopolitical and economic front, together with changes in the oil balance will reveal that whilst further strength in the immediate future cannot be ruled out, it would be overzealous to prognosticate oil to seriously challenge the July peak, let alone go anywhere near the annual summit achieved in April.

Ukraine/Near East: as the Russian aggression against Ukraine continues unabated events took an unexpected turn when the Ukrainian military, over the space of three weeks, captured around 1,200 square kilometres of the Russian region of Kursk. Whether it will change the course of the war is ambiguous, however, it implies that peace talks are anything but a possibility, the conflict will likely drag on and the regular and mutual attacks on energy infrastructures might cause sporadic flare-ups of anxiety in the oil markets – albeit its impact has plausibly been discounted in prices.

This prognosis is a fitting narrative for the Israel-Hamas war. Whatever promises and pledges are made about truce, the fact of the matter is that Israeli attacks on Gaza and now on the West Bank continue and so do Houthi assaults on commercial ships in the Red Sea. The latest atrocity was a strike on a Greek oil tanker which was set ablaze. The perpetual animosity between the warring parties adds a few dollars of risk premium to the price of a barrel, but unless actual supply disruption materializes, its impact will remain limited.

Economy/Interest rates: we arbitrarily choose three developments from last month that bear relevance on future economic prospects. Chinese data continues to disappoint. Economic expansion is mediocre and so is aggregate demand and retail spending. Factory activity plunged to its lowest in six months in August. Consequently, oil demand from the second biggest economy of the world is revised downward, product exports are on the rise and refineries are being shut down. Its support for the global market is diminishing.

The second one was the rise in US unemployment, which hit 4.3 in July. US job data, whilst has not trumped inflation figures in relevance, has grown in significance and will undoubtedly play a salient role in determining when and how to lower the borrowing cost for US consumers.

The good news is that monetary luminaries are increasingly open about a September rate cut, that much was made evident by the Fed’s chair speech at Jackson Hole two weeks ago. The 2.5% rise in the August PCE price index will not cause a setback in this effort. Whether it is 0.25% or 0.5% will depend on incoming data. Cheaper money should incentivize borrowing, underpin growth, weaken the dollar, provide relief for developing countries and spur physical and financial oil demand. Its early impact is likely to be positive, however, the ensuing optimism could re-ignite inflationary fears. There is a good chance that after the initial bout of cuts rates will stay at historically elevated levels in 2025 ultimately impeding the brightening prospects of a protracted rise in GDP and oil demand.

Oil balance: the August roundup is inconclusive and contradictory. There was a collective downgrade in global oil demand for 2H 2024 as well as for the entirety of 2025. The chasm between the IEA and OPEC demand estimates narrowed because the latter made some downward adjustment. Chinese oil demand projection was cut by 130,000 bpd for 2H 2024 and by 160,000 bpd for 2025 (both IEA figures).

Yet, OECD commercial stocks, a reliable indicator of future oil prices given the high reverse correlation between the two sets of data, are expected to have declined in the third quarter of the year. Depending on which source one believes they will remain stable in the last three months of the year or even deplete further. In the US, which is responsible for more than 40% of OECD industrial stocks, inventories have fallen for four successive weeks. Monthly EIA data implies that they will be at 1.23 billion bbls by the year’s end, 34 million bbls lower than end of July. Stockpiles in the developed part of the world will see a plunge of 68 million bbls during these five months. Yet, recent price action indicates that there are quite a few barrels missing from this equation.

This outlook is certainly not discouraging yet the reliability of the data can be questioned and the path the OPEC+ group will take is also expected to play a salient role in shaping the oil balance. Here the important questions are as follow: how long the outage in Libya will last? Production to meet domestic demand has resumed but exports is still halted. Will the group use it as a reason to go ahead with the gradual unwinding of the 2.2 mbpd voluntary cuts starting in October? Or is it the price level that predominantly impacts the OPEC+ strategy? Will Iraq, Kazakhstan and Russia put their money where their mouth is and compensate for the overproduction of the last months as promised? Whatever the answers to these questions turn out to be, those with bullish propensity must remember that Persian Gulf producers sit on a comfortable 4-6 mbpd of spare capacity that can be utilized at relatively short notice. The performance of the last month implies that the current trading range could remain unbroken for now but an upside break-out is increasingly inconceivable in the medium-term future.

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