In recent times, fears of a spillover in the conflict between Israel and Hamas, which could embroil Iran and its allies in the region, have offered considerable support to oil prices. Unfortunately for the bulls, the oil price momentum has fizzled out with the war risk premium that helped fuel an oil price rally in the early days of the Israel-Hamas war all but gone thanks to Israel’s ground incursion into Gaza proving to be less extensive than some investors expected.
But that’s just part of the picture, with no shortage of bearish catalysts in the oil markets. China’s economy continues sending mixed signals with recent reports of an unfolding debt crisis overshadowing earlier reports of robust demand for key commodities including oil, copper and iron ore.
China is the world’s largest importer of oil. Second, the Biden administration has temporarily eased sanctions on Venezuela's oil exports to help the country in efforts to conduct a fair presidential election next year, a move that analysts estimate could add as much as 200,000 bpd to oil markets.
Third, U.S. crude oil production has surged to an all-time high of 13.2 million bpd, blunting a good chunk of OPEC+ cuts. Finally, weekly data from Vortexa the volume of crude in global floating storage increased +5.8% w/w to 74.69 million bbl as of Oct 27, a sign of flagging demand. Related: UK Speeds Up Grid Connection For 20 GW Of Clean Energy
All these factors have taken a heavy toll on oil prices with WTI crude falling from this year’s high of $93.68 per barrel on September 27 to the current $80.24 while Brent crude has declined from $92.20 per barrel to $84.76 over the timeframe.
Luckily for the bulls, one major positive catalyst might provide the necessary thrust to pull oil prices out of the stall: a less hawkish Fed. On Wednesday, Federal Reserve Chairman Jerome Powell announced the decision to leave the policy rate, federal funds rate, unchanged at the range of 5.25-5.5%, a move that could do a world of good for oil and commodity prices.
Changes in the federal funds rate are known to directly impact the U.S. dollar.
When the Federal Reserve increases the federal funds rate, interest rates throughout the economy usually increase. The higher yields in turn attract investment capital from investors, including foreign ones, hunting for higher returns on bonds and interest-rate products. Global investors sell their investments denominated in their local currencies in exchange for U.S. dollar-denominated investments, resulting in a stronger dollar. The reverse happens when the Fed cuts interest rates leading to a weaker dollar.
Oil and many other commodities tend to have an inverse relationship with the dollar, with each moving counter to the direction of the other. Although the Fed did not cut interest rates, its less hawkish stance is already having a negative effect on the dollar with the U.S. dollar index, a metric that pits the greenback against a basket of six leading currencies, down 3.6% since Wednesday. Oil prices have not responded yet to the weakening dollar, but are likely to do so if this trend persists.
If the dollar continues to lose some muscle, investors will no doubt begin to speculate how high oil prices can go.
This brings us back to Standard Chartered’s report earlier this week noting that $98 oil is quite well supported by supply and demand fundamentals, with expectations that global demand will grow by 1.5 million barrels per day (mb/d) in 2024, with non-OPEC supply adding 0.88mb/d led by the US, Canada, Guyana and Brazil.
StanChart also predicted supply deficits in Q1 and Q2 that will eventually give way to a mild surplus in H2, with OPEC’s aim of stabilizing prices in an acceptable range is likely to continue, potentially leading to a further tightening of fundamentals in 2025.
StanChart analysts see a further 120-million-barrel reduction in global inventories in Q4, adding to a 172-million-barrel reduction from the third quarter.
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Mid-October saw the Middle East dominate oil price headlines, distracting the market from both falling inventories and producer policies aimed at achieving a soft landing for the market at higher price levels. Now, however, the Fed is in prime focus and fundamentals are back in play. Of course, any major change in sentiment on the Middle East to suggest a wider regional conflict could once again serve as a distracting force.
By Alex Kimani for Oilprice.com
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Moreover, the easing of US sanctions against Venezuela is as good as nothing since Venezuela can’t lift its production significantly without billions of dollars of investments and 5-6 years from now.
As for US oil production hitting 13.2 million barrels a day (mbd), we only have the word of the US Energy Information Administration (EIA) for that and it is questionable and will remain so until we get an independent assessment about US oil production.
The reason is that the EIA has been hyping about US production to the extent that some veterans of the shale revolution were so skeptical that they demanded more realistic production figures from the EIA but to no avail. A more realistic US production ranges from 10.0-11.0 mbd.
Still, with solid fundamentals of the global oil market, robust demand, China’s soaring crude imports and a tight market, Brent crude will range from $90-$100 between now and the end of the year even without new escalation of tension in the Middle East.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert