October has been a tough month for crude oil. WTI has dropped from $76 to $66 while Brent fell from $86 to $76. We started the month thinking that prices would exist in a tug of war between bullish supply/demand fundamentals and a bearish economic background and instead the market’s been served a relentless flow of bearish news for three straight weeks.
For supply/demand balances, the news flow has been focused on downgrades to 2019 demand forecasts and higher than expected supply gains in the United States. OPEC, the EIA and IEA all downgraded their expected refiner consumption for 2019 and China/U.S. trade disputes have added to concerns from analysts that the economic picture isn’t pretty. In the U.S., crude oil stocks have jumped by an incredible 29m bbls over the past five weeks. To put that in a seasonal context, inventories decreased by 6m bbls during the same period in 2016 and fell by 15m bbls during the same period in 2017. Much of the recent builds have been due to seasonal refiner maintenance but the more powerful force in the market for now seems to be that every key producer globally – with the exception of Iran and Venezuela – is pumping at record levels.
On the macro side we’ve been arguing for several months that a dimming growth outlook for 2019 would help keep a lid on prices. These concerns have been highlighted in October by falling global equity markets from Shanghai to New York which have been a primary driver of oil’s selloff. So far on the month, the S&P has dropped by about 10% while the Euro Stoxx 50 is lower by about 9%. More than one-third of U.S. companies have also been discussing U.S./China tariffs as a future headwind on earnings calls over the last month.
It's clear that there’s a bearish chill in the air this month but we also think that market participants would be wise to remember some of the bullish themes which supported oil (and nearly sent it to $100) just one month ago. On the macro economic front, yes, it is true that there are headwinds facing growth scenarios in 2019 such as increased interest rates and threats to global trade. It’s also true, however, that interest rates remain well below historical norms and that even if global trade expands in small percentage terms next year, we can still expect global crude oil demand growth to exceed 1m barrels per day. We also think that traders should continue to watch the relentless supply growth coming…