Tensions in the Middle East have driven Brent crude above $78 per barrel, yet the underlying market fundamentals continue to be bearish.
Weekly analysis of the oil market
Last week, crude oil prices in the markets surged sharply, driven by escalating tensions in the Middle East after Iran's missile attack on Israel, which was in retaliation for the assassination of a Hezbollah leader by Israel. Ambiguous remarks from US President Joe Biden about ongoing discussions regarding potential strikes on Iranian oil facilities in response to Tehran's attack caused crude prices to jump by over 5% last Thursday. Nevertheless, the upward pressure somewhat subsided on Friday following additional statements from the US, indicating that Israel might be considering alternatives to striking Iranian oil infrastructure.
On average this week, Brent oil futures for November delivery increased by $1.8/b to $75/b, while the December contract rose by $2.0/b to $74.6/b. WTI prices reached $71.2/b, a 2.5% increase. Economists surveyed by Bloomberg on October 3rd predict a decrease in Brent prices for the fourth quarter to $80.0/b (a $1/b drop) and to $78.6/b (a $1.4/b drop) for the first quarter of 2025. This reflects ongoing market concerns over rising global supply and persistent weak demand in China, despite recent attempts at economic recovery.
The surge in prices resulted in a rise of the Brent implied volatility index, hitting its peak in almost a year (fig. 11). Trading volumes for Brent call options also soared to unprecedented levels last Wednesday, especially for contracts at $100/b.
Despite the ongoing crisis, market fundamentals continue to indicate an excess supply. OPEC+ is set to reinstate some of its production capacity, with increments planned from December. Moreover, following a significant political standoff with Tripoli's government that lasted over a month, the eastern Libyan authorities declared last Thursday that oil production and exports would resume.
Iran's Influence on the Global Oil Market.
Last week, concerns about escalating tensions and potential attacks on Iran's oil infrastructure brought the nation's oil market into sharp focus. Despite being under embargo, Iran has significantly ramped up its oil production in recent years, going from less than 2 million barrels per day to nearly 3.4 million barrels per day, nearing the pre-2018 sanction levels imposed by former President Donald Trump.
This surge in production has seemingly occurred with the US administration's tacit consent, which viewed it as a strategy to temper rising crude prices, coupled with support from China, the primary purchaser, who has consistently disregarded Western sanctions. Furthermore, Iran has capitalized on OPEC's leniency, which has exempted its production from quotas, thus marking one of the most substantial production increases within the organization last year.
Numerous analyses have attempted to evaluate the potential consequences of an assault on Iranian oil facilities or a severe intensification of the embargo on the nation. These assessments suggest that oil prices might increase by $20/b (Goldman Sachs) to $28/b (Clearing Energy Partners). Nevertheless, these forecasts fail to consider a potential rise in OPEC production, which possesses enough spare capacity (5 Mb/d, with 3 Mb/d in Saudi Arabia alone) to compensate for a complete cessation of Iranian oil exports.
The global manufacturing sector experienced another slowdown in September.
The recent months have seen an intensification of the global manufacturing slowdown. The global manufacturing PMI, after peaking at a two-year high of 51.0 in May, has been in contraction (below 50) since July. In September, the index dropped nearly one point to a 14-month low of 48.8, as reported by S&P Global. Despite this, the recent and planned easing measures in the US, China, and the euro area may lend some support to the global industry outlook. Nevertheless, there are risks, including the potential for a surge in oil prices should the Middle East conflict worsen.
The global manufacturing slowdown is widespread, yet the downturn is predominantly observed in developed markets, where the average index dropped by 0.8 points to a nine-month nadir of 47.5 (August: 48.3). In emerging markets, the average index fell by one point to 49.8, marking the first contraction since January 2023 (August: 50.8). The euro area's fragility, particularly Germany's, is notable. Germany's manufacturing PMI plummeted to 40.6 in September (August: 42.4), a year-long low, precipitating a further dip in the euro area's average to a nine-month trough of 45.0 (August: 45.8).
In the USA, crude oil and gasoline stock levels are on the rise.
Last week, commercial crude oil inventories saw a significant increase of 3.9 million barrels (Mb), greatly exceeding the anticipated decrease of 1.4 Mb and the five-year average increase of 0.4 Mb. Currently, stocks are 1% higher than the previous year's levels, yet they remain 5% below the five-year average. This surge is attributed to a reduction in refinery processing of crude oil, primarily due to the closure of BP's Whiting refinery, coupled with a rise in production to 13.3 million barrels per day (Mb/d).
Regarding refined products, gasoline inventories expanded more than forecasted, with a rise of 1.1 million barrels (MBmb) compared to the expected increase of 0.2 MBmb, while distillate inventories fell more than anticipated by 1.3 MBmb. Presently, gasoline and distillate stocks are 1% and 7% below the five-year average, respectively.
In Europe, diesel prices are on the rise.
The Amsterdam Rotterdam-Antwerp (ARA) hub's petroleum product inventories have remained stable, with gasoline inventories increasing by 4% and diesel inventories decreasing by 1%. Following the trend of crude oil, gasoline prices saw a modest increase of 1%, while diesel prices rose by 3%. The ICE diesel forward for the current month closed the week $48/t higher on Friday, driven by concerns over potential regional conflicts in the Middle East, which have escalated diesel prices across Europe. By the end of Friday's session, European diesel shipments reached their highest point since late August, yet the demand for diesel has remained generally stable. Amidst these developments, the average refining margin in Europe (Brent FCC) fell by 7% to $5.0/b.
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