Further price volatility ahead as markets face bearish supply fundamentals and bullish Middle East conflict
It has been an extremely volatile week for oil markets, with front-month Brent futures almost reaching $81/bbl this Monday (7 October), up by almost $13/bbl from the lows seen just under a month earlier, but then plummeting to $77/bbl the day after.
Beyond the rumours on Tuesday (8 October) that the USA and its Western Allies have made some progress in dissuading Israel from attacking Iran’s energy and oil infrastructure, several other bearish developments have helped to counteract the very bullish mood at the start of this week.
In addition to the recent rally in the US dollar – which is up by almost 3% just this month – crude prices on Tuesday were also weighed down by news of a quicker-than-expected recovery in Libyan production back to above 1 mmb/d. Adding insult to injury (for the bulls) was the API survey released late Tuesday which showed US commercial crude stocks building by some 11 mmb (vs a smaller but still significant 6 mmb build from the EIA data released yesterday). For context, a stronger US dollar is typically associated with lower crude prices.
That said, huge questions remain over if/when Israel will target Iranian energy and oil infrastructure. Israel’s security cabinet is expected to vote today on its response to Iran’s missile attack from last week.
Despite what appears to be some profit-taking on Tuesday, options skew data for the ICE Brent Dec-24 contract is still exhibiting a very bullish (and atypical) call-bias. Although we expect to see some recovery in net long positioning when the next data is made available, the latest data for the week ending October 1 shows total crude managed money net longs remain very low.
Considering the potential consequences and supply at risk should Israel/Iran tensions escalate, there is clearly potential for prices to spike higher. Just yesterday, the Israeli Defence Minister stated that a retaliation against Iran would be “deadly, precise and above all surprising”. Moreover, it has become clear from surveys released in recent weeks that Israel’s course of action has in fact helped to boost the popularity of its Prime Minister Benjamin Netanyahu.
That said, while the risk of a supply outage remains, in our base case we do not see any material or sustained impact to oil infrastructure and continue to see prices trending lower as we move into 2025.