Brent crude prices have surged by USD 4.5 per barrel, or 6.2%, from last week’s low, now trading at USD 73.2 per barrel. The U.S. two-year yield has dropped to its lowest level since September 2022, while the dollar has weakened significantly due to rising expectations of lower interest rates. Yesterday, the S&P rose by 0.3%, while the Nasdaq fell by 0.5%. A weaker dollar boosted Asian currencies this morning, and heightened expectations of a rate hike in Japan contributed to a 1.8% drop in the Nikkei, driven by a stronger yen.

The recent rally in crude prices is underpinned by several factors, with macroeconomic signals weighing heavily on demand outlooks. A key driver is speculation that the Federal Reserve may implement a double interest rate cut tomorrow. While the Fed’s guidance has been vague, most analysts anticipate a 25 basis points cut, but markets are leaning toward the possibility of a 50 basis points cut. Significant volatility in FX markets is expected. Regardless of the size of the cut, looser monetary policy could stimulate energy demand, leading to a more bullish outlook for oil further along the curve.

In addition, China is showing stronger indications of increasing crude oil and product purchases at current price levels. Net crude and product imports in China rose by 20% month-on-month in August, though they remain 2.2% lower year-on-year in barrels per day. While still below last year’s levels, this uptick has eased concerns of a sharp decline in Chinese demand. Supporting this trend, higher dirty freight rates from the Middle East to China suggest the country is buying more crude as prices have pulled back.

Despite this, bearish sentiment remains in the market, particularly due to record-high speculative short positions driven by concerns about long-term demand, especially from China. This dynamic has resulted in oil prices behaving more like equities, with market participants pricing in future demand fears. However, the market remains tight in the short term, as evidenced by low U.S. crude inventories and continued OPEC+ production cuts. OPEC+, led by Saudi Arabia, has maintained its cuts in response to lower prices, supporting oil prices below USD 75 per barrel.

U.S. crude inventories have consistently drawn down, and OPEC+ continues to withhold significant supply from the market. Under normal circumstances, this would support higher prices, but ongoing concerns about future demand are keeping prices suppressed for now.

Brent crude prices have risen by USD 2.8 per barrel as of yesterday and this morning, currently trading at USD 71.8 per barrel. This is despite U.S. inventory data showing a notable build in both commercial crude and product inventories, typically a bearish signal for the market (details below).

The recent price recovery is unlikely driven by these inventory figures. Instead, it appears to be a response to OPEC+ signaling its intention to intervene if Brent crude prices fall below USD 75 per barrel (take time for the market to fully react). This was made clear last week when the group adjusted its production plans, delaying increases. Such action offers substantial downside protection, limiting further declines.

Over the past few weeks, Brent crude experienced a sharp sell-off, hitting a low of USD 67.7 per barrel on Tuesday. This decline was largely driven by demand concerns stemming from weak economic data in both China and the U.S.

While macroeconomic data for both nations remains sluggish, U.S. consumer spending has held up. For instance, the U.S. ISM non-manufacturing PMI for August showed the services sector expanding for a second consecutive month, recording 51.5 versus the expected 51.3. Although the U.S. economy is clearly decelerating – contributing to bearish market sentiment – the most recent jobs report saw the unemployment rate fall back to 4.2%. As a result, the anticipated Federal Reserve rate cut next week is expected to be 25 basis points, rather than the widely discussed 50 basis points.

Fundamental concerns persist. A ”soft landing” for the U.S. economy seems increasingly plausible, and China’s oil imports appear to be rising as current price levels attract more buying interest. This is reflected in higher VLCC freight rates from the Middle East to China.

As such, there are supporting factors that may limit further price declines, with the potential for prices to recover from here. For more details, read yesterday’s crude oil comment.

U.S. commercial crude oil inventories (excluding the Strategic Petroleum Reserve) increased by 0.8 million barrels last week, bringing the total to 419.1 million barrels, which is 4% below the five-year average for this time of year. This build occurred despite U.S. refineries processing 16.8 million barrels per day (bpd), a decrease of 141,000 bpd from the prior week. Refineries were operating at 92.8% capacity.

In addition, U.S. crude oil imports averaged 6.9 million bpd, an increase of 1.1 million bpd compared to the previous week. However, over the last four weeks, imports averaged 6.5 million bpd, down 7.3% from the same period last year.

For refined products, motor gasoline inventories increased by 2.3 million barrels, although they remain 1% below the five-year average. Distillate (diesel) fuel inventories also rose by 2.3 million barrels but are still 8% below the five-year average.

Overall, total commercial petroleum inventories increased by 9.0 million barrels last week.

On the demand side, total products supplied over the last four weeks averaged 20.5 million bpd, representing a 2.2% decrease compared to the same period last year. Motor gasoline product supplied averaged 9.0 million bpd, up 0.9% year-over-year, while distillate fuel product supplied averaged 3.7 million bpd, down 0.2%. Jet fuel demand fell by 2.3% compared to the same period last year.

Despite the increase in U.S. inventories, overall levels remain relatively low, which could become a key factor in shifting market sentiment and driving prices higher.

Rebound after a very bearish day as US inventories declines further. Last week Brent crude broke down below USD 75/b. And it didn’t take long before the heralded production increase was shifted out two months to instead start in December. This however, was far from enough to halt the oil price sell-off where Brent crude traded down to USD 68.68/b (-4.4%) before closing the day at USD 69.19/b (-3.7%). The market was gripped with bearish demand fears and there were hardly any bullish voices to be heard. This morning Brent is rebounding 1.5% to USD 70.25/b. US inventories likely continued to decline last week by around 3 mb according to indics by API in an extension of steady declines since mid-June. Russia and other OPEC+ members complied better to quota targets in August.

A (hybrid) market share war. A fight over market share between OPEC+ and non-OPEC+ is indeed a key element of the latest turmoil in the oil market. And not the least unclarity over how exactly the group is going to execute its long heralded production increase. But the group partially showed its cards last week when it modified its plan to hike production almost immediately after Brent crude fell below USD 75/b last week.

This is very different from 2014/15. OPEC+ is clearly set to return volumes to the market. But this looks very different from 2014/15 when OPEC simply flooded the market with oil and crashed the price. This time around the group is behaving more like a central bank. In June they laid out and communicated to the market their plan to return 2.2 m b/d of voluntary cuts to the market. Gradually lifting production from Q4-2024 to Q3-2025. They communicated this long time in advance of when the actual production increase is supposed to take place. At first it shocked the market and Saudi Arabia was forced to soften the message with ifs and buts. Saying that the plan will be adaptable to market circumstances once we actually get to Q4-2024. Though without being too specific about it. And now we are very, very close to Q4. The market is hit by China weakness as well as a bit of unclarity over the ”new” strategy of OPEC+. The oil price tanks.

They will lift production by 2.2 mb/d but it will take longer time. We do believe that OPEC+ will indeed lift production by 2.2 m b/d as stated but that they will spend more time doing it and also that they will have to accept a somewhat lower price to get it done. If nothing else they need to lift production back towards more normal levels in order to be in a position to cut again when the next crisis occur. Just like central banks needs to lift interest rates in order to be positioned to cut the yet again.

Not all bearish. Here are some bullish elements. Amid all the bearish concerns which is gripping the market currently here is a list of supportive elements.

1) OPEC+ modified its production increase plan the moment Brent fell below USD 75/b. More modifications to come if needed in our view.

2) Better compliance by OPEC+ members in August with Russia now very close to production quota-target.

3) US oil inventories have fallen steadily and counter seasonally since mid-June and likely fell another 3 mb last week (crude and products) according to indic. by API. Global floating crude oil stocks have declined by close to 50 mb since a peak in mid-June.

4) VLCC freight rates from the Middle East to China are ticking higher. Probably a sign of increased appetite for oil imports.

5) US EIA yesterday reduced its US crude oil production forecast marginally lower along with a slightly lower price forecast.

Deep rooted market concerns at the moment are about fear for coming surplus with predictions that the market will flip to surplus some time in November and December. Thus no surplus as of yet. Though Chinese weakness is apparent to be seen.

An oil price of USD 75/b in 2025 will likely give OPEC+ what it wants. A somewhat lower oil price (SEB 2024 Brent average forecast is USD 75/b) will be very positive for the global economy, lower inflation, lower interest rates, higher oil demand growth down the road and also further dampening of US shale oil production growth. A WTI crude oil price of around USD 70/b will likely also stimulated the US government to buy more oil to refill its Strategic Petroleum Reserves (SPR) which were heavily depleted in 2022/23. All good things for OPEC+ and its ability to place 2.2 mb/d of oil back into the market.