The nearly four-month-long oil price rally has finally come unstuck, with oil prices crashing spectacularly over the past week thanks to a smaller-than-expected weekly decline in domestic crude supplies accompanied by a much larger-than-expected increase in fuel inventories.
WTI crude for November delivery has crashed from $93.68 per barrel on September 27 to $82.50 per barrel on October 6, good for an 11.9% decline while Brent crude for December delivery has declined by more than 10.5% to trade at $84.23 per barrel over the timeframe, both four-week lows.
Although U.S. crude stocks fell by 2.2M barrels to 414M barrels, stocks at Cushing, Oklahoma, climbed for the first time in eight weeks.
"Fears over demand factors are creeping back in the marketplace. Global macroeconomic headwinds and rising yields [suggest] the price of oil may have reached a short-term peak," Spartan Capital’s Peter Cardillo has said.
The bulls can, however, take some comfort in the fact that some Wall Street experts are now saying that oil markets are ready for a rebound. According to commodity analysts at Standard Chartered, the recent price dynamics are less a function of poor fundamentals but have more to do with a burst of volatility in a market where volatility was too low, combined with end-of-quarter rebalancing effects and the stopping out of some of the most recently added and least committed crude oil longs, particularly among momentum traders.
StanChart says recent price movements have been heavily distorted by contract expiry in a steeply backwardated market, noting the steep oil price crash is likely to embolden the bears.
However, the experts say current prices remain both fragile and too low given current fundamental balances, and are likely to rebound once the steep front-of-the-curve backwardation is stripped away and the effects of over-extended speculative length are factored in.
On Wednesday, Saudi Arabia and Russia said they will maintain voluntary oil supply cuts to the end of the year, in an effort to support an oil market where prices have pulled back sharply in recent days. Saudi Arabia has cut crude production by 1M bbl/day while Russia has trimmed oil exports by 300K bbl/day, on top of earlier cuts made with other OPEC+ nations. Saudi production for November and December will total ~9M bbl/day.
StanChart has maintained its Brent average forecast for Q4 at $93/bbl, a level it has maintained for the past 15 months, saying its projected supply and demand balances for Q4 support that level. The commodity analysts say they don’t expect dips below USD 90/bbl to prove sustainable, suggesting oil markets have overshot on the bearish side of things.
Oil Demand Destruction
It’s going to be interesting to see how this plays out considering the bears have advanced a pretty strong case that the latest oil price crash is the result of demand destruction courtesy of high oil and fuel prices.
JPMorgan analysts have warned that oil demand will decline in the current quarter due to the previous nearly 30% rally in oil prices in the previous quarter.
‘‘After reaching our target of $90 in September, our end-year target remains $86 [per barrel]. Moreover, demand restraint from rising oil prices is once again becoming visible in the US, Europe, and some EM countries,” reads the note titled "Demand destruction has begun (again).
China and India drove global oil demand growth this year, but China opted to draw on domestic crude inventories in August and September after oil prices surged. There are already signs that consumers have responded by cutting back on fuel consumption,” wrote Natasha Kaneva, head of the global commodities strategy team at JPMorgan.
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That bearish thesis should, perhaps, give the bulls food for thought given the latest crude and distillate trends suggest that demand could indeed be eroding. Gasoline and diesel prices remain elevated and have only declined slightly from previous highs. A gallon of gasoline is currently retailing at a national average of $3.768, slightly lower than $3.835 a week ago and $3.831 a year ago while diesel is selling at $4.554 a gallon from $4.567 a week ago and $4.866 12 months ago.
By Alex Kimani for Oilprice.com
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