The dynamics of oil prices in October showed another high increase, with Brent prices crossing $85 a barrel and West Texas Intermediate tipping $84 a barrel. This rally was supported by expectations of high demand and a supply shortage.
However, in the last trading week of the month, prices posted their first weekly loss in two months, with easing fears of insufficient supply and forecasts of a reduction in demand.
In addition, traders were cautious, while continuing to assess the underlying market factors. Whether this marks the end of the recent rally in the oil market remains to be seen, as there are still bullish factors on the horizon, which may compensate in the coming weeks for the current decline.
The main bearish factor was the interventions of the Chinese authorities in the coal market. This led to a collapse in its prices by almost 50 percent from recent peaks, which partially pulled down oil prices. Stabilizing the coal market reduces the risk of increasing demand for crude oil due to a shortage of gas and coal. The crisis in the real estate market in China also had a negative impact on commodity markets, threatening a drop in consumption.
The other bearish factor was the strong growth in US oil inventories. Official EIA (Energy Information Administration) statistics showed an increase by 4.3 million barrels in crude inventories on the back of stable production and a jump in net imports by 0.7 million barrels per day.
This was significantly higher than forecasts from analysts, who assumed an increase in oil inventories by 1.9 million barrels.
At the same time, stocks of gasoline and distillates decreased by 2 million barrels to their lowest level in nearly four years, despite US consumers facing rising prices. As a result, the aggregate supplies of petroleum products, an indirect indicator of fuel demand, fell by exactly 2 million barrels per day to 19.8 million barrels per day.
Pressure on crude oil prices has also increased following the statement by Iranian officials that negotiations on a nuclear deal with the US could be resumed at the end of November.
On the bullish side, the key world economies, led by China, continue the path of a confident recovery after a series of full or partial lockdowns, creating increased demand for oil.
Dr. Namat Al-Soof
If successful, Iran can release oil and gas exports from sanctions and increase production by up to 1 million barrels per day. However, the Iranian story is still far from conclusion. First, the course of negotiations will depend on the political mood in the country, and it is unlikely to be easy, given the position of the current government.
Secondly, even if successful, it is not clear what the condition of the country’s production facilities is like. It is possible that the recovery will take months.
On the bullish side, the key world economies, led by China, continue the path of a confident recovery after a series of full or partial lockdowns, creating increased demand for oil.
At the same time, the oil market received fresh statements from OPEC+ countries in favor of maintaining the status quo at the upcoming meeting on Nov. 4, as the heavyweight alliance of Saudi Arabia and Russia have expressed support for a continuation of the cautious supply approach.
In this regard, Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg in an interview last week: “OPEC+ needs to remain cautious with its approach to oil production adjustments despite rising prices.”
He said: “We don’t take things for granted. We still have COVID-19, there are still lockdowns, and jet fuel supply remains constricted. So, we’re not yet out of the box and we’re not out of the realm of COVID-19.”
The Algerian energy minister echoed this concern last week, citing high risks and uncertainties.
Indeed, the 56th meeting of the OPEC+ Joint Technical Committee downgraded the expectations of a market deficit to 300,000 barrels per day in the fourth quarter, down from initial expectations of 1.1 million barrels per day, according to Bloomberg sources.
This outcome justifies the continued cautious approach of the alliance in adding more oil to the market.
These market dynamics are supported by the natural gas crisis in Europe and the expectation of a shortage of energy resources, generated primarily by European countries, on the eve of the abnormally cold winter of the 2021-2022 season.
For now, the key event of the month is the OPEC+ meeting on Nov. 4. Despite mounting pressure from major consumers to ramp up production, the status quo is now broadly anticipated to be maintained.
As a result, Brent is widely expected to be traded in November in the range of $82-$86 per barrel in expectation of new drivers. WTI is expected to be traded within the range of $81-85 per barrel. Fluctuations beyond these ranges are not excluded.
• Dr. Namat Al-Soof is an Iraqi oil expert with long experience in upstream and market analysis. He held senior analyst positions at OPEC, the IEF in Riyadh, and the OPEC Fund for International Development. Currently, he is a consultant to a number of companies in the oil industry.
