Brent crude prices have traded sideways since opening on Tuesday, consistently hovering around USD 74.2 per barrel for three consecutive days. However, since yesterday evening, prices have risen by USD 0.5 per barrel and are currently trading at USD 74.5. This increase primarily reflects core market fundamentals, and another bullish US inventory report released yesterday at 16:30 CEST.

The highly anticipated Israeli retaliation remains muted for now, easing the risk premium and reducing the severe tensions in the Middle East. However, the conflict continues: Israel’s Foreign Minister confirmed yesterday that Hamas leader Yahya Sinwar had been killed by Israeli forces in Gaza.

Media reports suggest that the US might use this opportunity to attempt to broker an end to the fighting, although Netanyahu emphasized in a speech yesterday that the conflict is far from over. Consequently, markets will remain volatile pending further developments.

Independently of the scale and strategy of the Israeli retaliation, we may currently be witnessing a shift in the oil market. The focus is moving from widespread fear of impacts on critical Iranian oil infrastructure to an expectation that the US will enforce sanctions on Iranian oil exports more strictly post-US elections. Both scenarios could lead to reduced Iranian oil production in 2025, thus potentially balancing the oil market and allowing OPEC+ to return barrels to the market without significantly lowering prices.

In recent years, the US has been reluctant to impose strict sanctions on Iranian oil exports to avoid driving up prices. Now, the situation has changed. 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 nearly 6 million barrels per day in spare capacity – with Saudi Arabia alone capable of boosting production by nearly 3 million barrels per day – the global oil supply remains robust, making it easier to enforce strict sanctions on Iran.

However, any significant reduction in spare capacity would naturally diminish the global balancing buffer and potentially elevate oil prices in the future. Thus, regardless of the situation, ongoing tensions in the Middle East are likely to persist, with a higher probability of oil prices trending upward rather than downward.

In terms of fundamentals, the latest US DOE report revealed a bullish drawdown of 2.2 million barrels in US commercial crude inventories. Currently, at 420.5 million barrels, US crude oil inventories are about 5% below the five-year average for this time of year.

Gasoline and distillate inventories also decreased by 2.2 million and 3.5 million barrels, respectively, both significantly below seasonal averages. Total commercial petroleum inventories decreased by 7 million barrels last week, indicating continued tightness in the US market.

US refinery inputs averaged 15.8 million barrels per day, a slight increase from the previous week, with refineries operating at 87.7% capacity. Gasoline production decreased to 9.3 million barrels per day, while distillate production dipped to 4.8 million barrels per day. Meanwhile, there was an uptick in implied demand for total products, up nearly 3% compared to the same period last year. Over the past four weeks, gasoline products supplied averaged 9.0 million barrels a day, up by 5.4% from the same period last year. Distillate fuel product supplied averaged 4.0 million barrels a day over the past four weeks, up by 0.2% from the same period last year. Jet fuel product supplied increased by a substantial 10.4% compared with the same four-week period last year.

In summary, while we continue to see a reduced geopolitical risk premium, more upside potential remains. The ongoing tight fundamentals in the US also support this view. Hence, although prices have stabilized, the potential for upside risks outweighs the downside, supporting a short-term buy recommendation.

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!