Oil markets have experienced significant turmoil in recent weeks, driven by pervasive macroeconomic concerns that triggered momentum-following algorithms. This turbulence led to a steep decline in oil prices, worsened by banks’ gamma hedging activities. As a result, the bearish sentiment among money managers has reached its most extreme level since the Global Financial Crisis of 2008.
On September 10, front-month Brent crude plummeted to $68.68 per barrel, marking its lowest point since December 2, 2021. While prices have since rebounded by approximately $5 per barrel, analysts from Standard Chartered caution that this recovery is limited, given the current speculative positioning, suggesting that a more substantial short-covering rally may be warranted.
In terms of near-term oil price direction, Standard Chartered acknowledges the challenges in deriving clear signals from market fundamentals amidst this dislocation. Their machine-learning tool, SCORPIO, has recently produced unreliable price predictions. However, the firm identifies several key bullish factors.
Firstly, there is no oversupply in the market. September is expected to be one of the tightest months of the year due to seasonal demand and supply disruptions in Libya and the U.S. Gulf. Standard Chartered anticipates that the restoration of Libyan oil production will take longer than previously expected. Despite initial optimism following comments from the former governor of Libya’s central bank regarding imminent agreements to restore full exports, negotiations have stalled, with Libyan crude exports currently at about 550,000 barrels per day—roughly half the pre-crisis level of 1.2 million barrels per day. Analysts warn that the market may have prematurely priced in a resolution to this ongoing crisis.
Secondly, a supply glut is unlikely through at least the fourth quarter of 2024 and the first half of 2025 if OPEC+ adheres to its production commitments. Last week, Standard Chartered highlighted that the market is overlooking the impending removal of additional barrels from circulation. In July, Russia, Iraq, and Kazakhstan submitted plans to compensate for overproduced crude volumes, with OPEC stating that these volumes will be fully accounted for over the next 15 months.
According to Standard Chartered, these compensatory cuts will translate to a combined reduction of 370,000 barrels per day in October, tapering to between 162,000 and 206,000 barrels per day from November 2024 to September 2025. If OPEC+ members fulfill their commitments, production is expected to decrease by 530,000 barrels per day in the fourth quarter of 2024 and by 540,000 barrels per day in the first two quarters of 2025.
The firm emphasizes that the market’s assumption of no compensatory reductions is misguided. Saudi Arabia, in particular, is unlikely to tolerate any further slippage from overproducing countries, as indicated by recent high-level engagements between OPEC Secretary General Haitham al Ghais and officials in Iraq and Kazakhstan.
Additionally, the latest data from the U.S. Energy Information Administration (EIA) reveals a continuing decline in crude inventories at Cushing, Oklahoma, which fell for the fifth consecutive week and for nine out of the last ten weeks. Crude inventories decreased by 1.7 million barrels week-over-week, reaching a ten-month low of 24.69 million barrels and standing 11.25 million barrels below the five-year average.
As the oil market grapples with these dynamics, the interplay of supply constraints and speculative positioning will continue to shape price movements in the coming months.
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