Lack Of WW3 Sends Oil Prices Lower... For Now

The prospect of more crude from Venezuela and higher US crude inventories has been pressuring the physical side; and the lack of WW3 as the first signs of aid reaching Palestinians in Gaza appears to be eating away at the geopolitical risk premia baked into the flat price.

“Crude is battling the trifecta of headwinds today,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth.

“Geopolitical risks are easing modestly, physical indicators are softening, and the US dollar is rising. Much of the recent length in the market has been driven by retail buying, which tends to be short-term, event-driven traders.”

WTI remains above its pre-Israel level; but that geopolitical premium is fading...

Concerns about the conflict spreading more broadly have eased amid growing calls within Israel to rethink a ground invasion of Gaza.

However, the possibility remains of Washington ramping up compliance checks on sanctioned Iranian oil and Tehran disrupting key shipping routes.

“A material disruption in supplies remains a tail risk that is likely being balanced by demand concerns amid relatively elevated spare capacity,” Barclays Plc analyst Amarpreet Singh said in a note to clients.

But, the International Energy Agency (IEA) believes the current level of oil storage in member states is enough to satisfy supply disruptions (despite the agency’s total inventories shedding 182.7 million barrels over the course of 2022).

Additionally, on the supply side, Bloomberg reports Russia’s oil flows are climbing steadily as Moscow’s adherence to a pact with Saudi Arabia to keep barrels off the global market shows signs of waning.

Four-week average volumes have been rising relative to the reduced shipments target since the start of September, exceeding it by about 220,000 barrels a day in the most recent period.

But, Saudi Energy Minister Prince Abdulaziz bin Salman said at the annual investment forum in Riyadh that Saudi Arabia's strategy for managing the oil market "is working", adding that The kingdom has to “ensure that we have a less volatile oil market that will help the global economy to grow and prosper."

“I don’t think Exxon would merge with Pioneer for charity purposes, or for that matter Chevron would do that with Hess,” Prince Abdulaziz said.

“It is a testament by its own virtue that hydrocarbons are here to stay.”

On the demand-side, Eurozone macroeconomic data this morning was also borderline recessionary (but recent headline China and US data has surprised to the upside - whether you believe it or not).

But, Amin Nasser, chief executive officer of state producer Saudi Aramco said that oil will continue to see “significant” demand growth as economies bounce back and major consumers like China return to faster growth.

Energy consumption is continuing to grow even as economies face headwinds, Nasser said.

Finally, as we detailed here, it appears hedge funds have shifted from shorting energy stocks (to near record levels) to shorting the commodity outright.

But, as Bloomberg reports, there is one hedge fund manager who is betting the other way.

As inventories decline in the coming months, “the market will have to beg for more supply at some point,” the founder of Andurand Capital Management LLP said during a question-and-answer session at Saudi Arabia’s Future Investment Initiative in Riyadh.

“The Saudis will have to decide when and at what price to bring supply back,” he added.

“For me, an adjustment likely will come around $110 a barrel. So there’s room to the upside for prices.”

Andurand said Saudi policy remains the deciding factor for crude prices and sees oil demand reaching a high later this decade, then trailing off.