The significant oil price rally that began last week and resulted in an increase of nearly $10 per barrel has begun to reverse. As of 11:40 AM ET on Thursday, Brent crude futures for December delivery were priced at $76.63 per barrel, while West Texas Intermediate (WTI) crude was at $73.24 per barrel. This represents a marked decline from Monday’s two-month highs of $81.12 for Brent and $77.91 for WTI. The initial rally was sparked by indications from Washington regarding potential Israeli strikes on Iran’s oil facilities.
Analysts from Citi have estimated that a substantial attack by Israel on Iran’s oil export capacity could potentially remove 1.5 million barrels per day (bbl/day) from the market. If the focus shifts to downstream assets and less critical infrastructure, the loss could range from 300,000 to 450,000 bbl/day. In August, Iran’s oil output reached a six-year high of 3.7 million bbl/day, according to ANZ Bank.
Clearview Energy Partners has projected that oil prices could rise by up to $28 per barrel if flow through the Strait of Hormuz is obstructed, $13 per barrel if Israel strikes Iranian energy infrastructure, and $7 per barrel if the U.S. and its allies impose economic sanctions on Iran.
However, the bullish outlook for oil prices faces resistance from short sellers. Commodity experts at Standard Chartered indicate that the latest rally was primarily driven by short sellers covering their positions amid escalating Middle East tensions. Nonetheless, they caution that these short sellers are not abandoning the market entirely. Analysts at Standard Chartered have observed that the market’s reaction to recent events in the Middle East, especially threats against Iranian energy assets, has been lackluster. Notably, Brent’s front-month settlement on October 7 was lower than the equivalent settlements in 2021, 2022, and 2023, with current prices merely returning to levels seen as recently as late August. The prevailing bearish sentiment in the oil market has remained largely unchanged over the past three months, with many traders poised to short oil aggressively if market dynamics permit.
According to positioning data up to October 1, there was little change in trader behavior, as net selling of WTI crude futures by money managers outweighed net buying. Standard Chartered’s proprietary crude oil positioning index reflected a slight week-on-week change, registering at -69.1. The recent stimulus in China and increased violence in the Middle East have not deterred short sellers from their positions.
The recent oil price decline was further fueled by the release of the latest weekly report from the Energy Information Administration (EIA), which Standard Chartered considers highly bearish. The report revealed a weekly decline of 0.91 million barrels in total commercial inventories, bringing them to 1,267.08 million barrels. The deficit below the five-year average increased by 1.72 million barrels, reaching a 20-week high of 20.74 million barrels. Unfortunately for bullish investors, the bull-bear index was significantly influenced by increases in crude oil, gasoline, and distillate inventories, both in absolute terms and relative to five-year averages. Crude oil inventories rose by 3.89 million barrels week-over-week to 416.93 million barrels, with the deficit below the five-year average narrowing by 3.46 million barrels to 18.44 million barrels. Standard Chartered noted an unusual trend, where every component of the weekly crude balance change pointed toward higher inventories: increased domestic production, rising imports, declining exports, reduced refinery runs, slower Strategic Petroleum Reserve (SPR) fill, and an elevated adjustment term.
European Natural Gas Prices Decline
In related developments, European natural gas futures fell below €40 per megawatt-hour, trading at €38.52 per megawatt-hour after reaching a ten-month high of €41 earlier in the week. This decline was largely attributed to increased wind power generation and stable Norwegian gas supplies.
EU gas inventory builds have been sluggish, with the latest weekly increase dropping to less than 30% of the five-year average. Data from Gas Infrastructure Europe (GIE) indicates that Europe’s gas inventories stood at 111.05 billion cubic meters (bcm) on October 6, reflecting a week-over-week build of 391 million cubic meters (mcm). Notably, three daily changes were below 50 bcm, including a 42 mcm draw on October 2. The deficit compared to last year has grown to 1.5 bcm, while the surplus over the five-year average has diminished to a 23-month low of 6.17 bcm. Current inventory-building trends suggest that this year’s seasonal maximum may only reach 112 bcm, down from the previous August forecast of 166 bcm.
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