Brent crude prices have declined for a third consecutive session, now plummeting by a substantial USD 3.1 per barrel since Monday’s close. Prices fell from USD 77.7 in the evening to the current USD 74.5. This decrease primarily reflects the easing tensions in the Middle East and the reduced likelihood of impacts on critical Iranian oil infrastructure.

Retaliation from Israel remains highly anticipated, yet its potential effect on energy infrastructure is now being questioned. Reports suggest that Israel may avoid targeting Iran’s oil facilities, alleviating concerns over major supply disruptions. Israeli Prime Minister Netanyahu has shown a preference for striking military sites rather than oil or nuclear facilities, as part of ongoing discussions with the Biden administration amidst the current turmoil.

The oil market has been notably volatile due to escalating tensions in the Middle East, exacerbated by the pending Israeli response to the Iranian missile attack on October 1. However, the anticipated non-disruptive retaliation against Iranian oil infrastructure is shifting market focus back to economic slowdown concerns in major economies, including China, thereby exerting downward pressure on oil prices.

Moreover, the absence of new stimulative measures from China’s Finance Ministry has tempered expectations for a boost in crude consumption in the world’s largest oil importer.

Complicating the market landscape, OPEC recently adjusted its demand growth projections downward for this year and the next, marking the third consecutive cut. OPEC now forecasts oil demand in 2024 and 2025 to be 104.1 million barrels per day and 105.7 million barrels per day, respectively, a decrease from previous estimates of 104.2 million and 105.8 million barrels per day.

Despite these projections, OPEC+ remains committed to increasing production by 180,000 barrels per month starting December 2024, culminating in an increase of 2.2 million barrels per day by December 2025. Nonetheless, we anticipate that the cartel will continue to closely monitor market conditions and perform monthly evaluations, potentially adjusting the production scale to stabilize prices within the mid-70-to-80-dollar range. We maintain confidence in the planned December 2024 production increase of 180,000 barrels, which currently places downward pressure on global oil prices as winter approaches.

However, it’s important to note that the risk of price spikes has not been entirely eliminated. Ongoing geopolitical risks, particularly concerning Iran, remain central to the market. The potential for Israeli retaliation continues to mitigate any significant downside in oil prices. Israel’s strategic calculations could be influenced by the upcoming US election on November 5th, as geopolitical alignments could shift, potentially impacting the timing and nature of military actions (read more: Benign macro fundamentals, geopolitical risks). Despite US discouragements against striking Iranian oil infrastructure, recent dialogues between Netanyahu and Biden do not guarantee the avoidance of such actions.

With this context, we continue to perceive substantial upside risks if the conflict escalates further and affects energy infrastructure. Although prices have declined, the potential for upside risks far outweighs the downside, supporting our recommendation to buy on these dips.

Brent crude prices have declined by slightly above USD 4 per barrel since Monday’s close, dropping from a high of USD 81.2 on Monday evening to the current price of USD 77. This decrease reflects the market’s nervous anticipation of Israel’s response to Iran’s missile attack last Tuesday is slowly fading. The attack, which, despite involving approximately 200 ballistic missiles, reportedly caused limited damage – a fact still under verification.

While retaliation from Israel is anticipated, the heightening tensions appear to be slowly subsiding, and the market is gradually less tilted to factor in potential escalations in the Middle East.

Historically, despite prolonged conflicts in regions like Russia-Ukraine and the Middle East, the global oil market has not experienced a loss of supply. This continued availability has contributed to a reduction in the geopolitical risk premium, prompting a more immediate focus on the market fundamentals and leading to the recent price retreat.

The drop in oil prices was further influenced by the disappointing lack of details regarding Chinese economic stimulus and was accompanied by a notable build in commercial crude inventories, reported at 5.81 million barrels. However, the latter was less of a price driver as the API figures released on Tuesday evening indicated a substantial increase in US crude stocks by 11 million barrels – the largest build in over eight months if confirmed by the DOE.

Additionally, the OPEC+ deal remains unchanged, with plans to increase production by 180,000 barrels per month starting December 2024, resulting in an increase of approximately 2.2 million barrels per day over the next 12 months. This strategy continues to exert downward pressure on global oil prices.

However, it’s crucial to recognize that the risk of price spikes has not been completely mitigated. The ongoing geopolitical risks, especially concerning Iran, continue to be a focal point. With Brent crude currently at USD 77 per barrel – returning to the robust price levels seen in late August – a significant and forceful Israeli response could jeopardize Iranian oil exports, potentially driving prices higher.

Despite US discouragement of Israeli strikes on Iranian oil infrastructure, recent discussions between Israeli Prime Minister Benjamin Netanyahu and US President Joe Biden do not guarantee that such actions will be avoided.

Given this backdrop, the market remains in a ”wait and see” mode, with considerable upside risks if the conflict escalates further and impacts energy infrastructure in the Persian Gulf. The nature of Israel’s impending retaliatory actions will likely dictate the conflict’s trajectory. We advise maintaining caution, yet suggest buying on dips(!), as the potential for upside risks outweighs the downside in the current volatile environment.

For more information of a potential worst-case scenario, read Tuesday’s crude oil comment: Brace for impact!

Brent crude prices have soared by nearly USD 10 per barrel in just one week, escalating from a low of USD 69.9 on September 1st to the current USD 79.4 per barrel. Yesterday, Brent traded as high as USD 81.2 before retreating slightly in today’s session, reaching levels not seen since late August.

Despite Saudi Arabia’s focus on volume over price and its intention to abandon the unofficial oil price target of USD 100 per barrel, the Kingdom is likely to increase production gradually by 180,000 barrels per month, amounting to a +2.2 million barrels per day increase over the next 12 months starting from December 2024. This bearish strategy led to plummeting prices in late September.

Price support has also come from China’s recent implementation of stimulus measures aimed at achieving its 5% growth target, primarily focusing on the stressed property market. In the short term, this stimulus is unlikely to translate into significant demand growth for Chinese oil. For context, the latest data on Chinese refinery utilization shows a slight improvement, though still well below the levels of 2023. Additionally, Chinese oil demand in August was down by approximately 6% year-over-year.

Setting aside Saudi Arabia’s defense of its market share and China’s economic measures, the spotlight is now on geopolitics – specifically, the escalating tensions in the Middle East, which are putting Iranian oil exports at risk and boosting Brent prices.

The market is holding its breath, awaiting Israel’s response to Iran’s missile attack last Tuesday. Approximately 200 ballistic missiles were launched, reportedly causing limited damage. However, retaliation is expected, and the market is pricing in the potential escalation of conflicts in the Middle East.

Leading up to the attack, speculative positions in Brent crude were at record lows, setting the stage for a sharp rebound following the missile strike on October 1st. Despite managed money purchasing 120 million barrels in the past three weeks from the September 10th low, this still marks the fourth-lowest position since 2011, according to ICE. This record bearish positioning was driven by deteriorating outlooks for major economies since the summer and the resulting subdued oil consumption growth.

Yet, these significant bearish positions also primed prices for a sudden surge following a shift in supply and demand. For instance, potential Israeli retaliation targeting Iran’s oil fields, refineries, and export terminals has driven prices dramatically higher. With this backdrop, there are substantial upside risks to both speculative positions and global oil prices if the conflicts escalate further and affect energy infrastructure in the Arabian Gulf.

Israeli retaliation could range from a limited strike, which might not provoke severe Iranian retaliation, allowing Iran to continue its crude exports to China at approximately 2 million barrels per day, to more severe attacks potentially provoking Iran to target oil infrastructures in the UAE and Saudi Arabia and to attempt to block the Strait of Hormuz which transports 18 million barrels per day of crude to the global market (20% of global oil consumption). This blockade could severely constrain supply, spiking oil prices given the already low US crude inventories.

Although the worst-case scenario of a severe escalation is unlikely, the region has been managing serious and escalating conflicts for some time. Just yesterday marked one year since the October 7th attack on Israel, and thus far, the global market has not lost any oil. The most severe market impact to date has been the rerouting of oil around Africa due to Houthi attacks on ships in the Red Sea.

Additionally, should Iran’s entire oil export capacity be disabled, the global market would lose roughly 2 million barrels per day of Iranian crude and condensate. Yet, with OPEC+ holding a spare capacity of nearly 6 million barrels per day – with Saudi Arabia alone able to boost production by nearly 3 million barrels per day – the global oil supply is robust. However, a significant reduction in spare capacity would naturally elevate oil prices, diminishing the global balancing buffer.

Despite the low probability of a worst-case scenario, the global markets remain on edge following the unexpected events like Russia’s invasion of Ukraine. Markets are exceedingly nervous about future developments. The upcoming retaliatory attack by Israel will likely set the tone for the conflict moving forward. Prepare for potentially higher prices and increased volatility!