Since yesterday morning, Brent crude prices have climbed by ish USD 2 per barrel, recovering to the current level of USD 73.9 per barrel. This represents a significant price movement over a short period and marks the largest such increase since mid-November.

Market whispers suggest that OPEC+ is likely to announce a deal to further delay the planned supply increase during their meeting scheduled for tomorrow (December 5th). Concerns about weaker global demand in the coming year leave little room for additional OPEC+ supply, compelling the cartel to exercise patience in its efforts to regain market share.

Adding to the upward pressure on crude prices, the U.S. has escalated its sanctions on Iran, targeting the country’s vital oil sector – a critical source of revenue.

Yesterday (December 3rd), the U.S. imposed sanctions on 35 entities and vessels associated with Iran’s ”shadow fleet,” which secretly transports Iranian oil. These operations rely on fraudulent practices such as falsified documentation, manipulated tracking systems, and frequent changes of ship names and flags. This move builds upon earlier sanctions, including those introduced in October this year, which restricted transactions involving Iranian petroleum and petrochemical products.

According to the U.S. Department of State, the latest measures aim to further disrupt Iran’s ability to finance activities deemed destabilizing in the Middle East, including its nuclear program and support for regional proxies.

From a market perspective, Iran’s crude oil and condensate exports reached roughly 1.7 million barrels per day in May 2024, the highest level in five years. China, as Iran’s largest importer, accounted for ish 490k barrels per day of these exports in 2023. The newly imposed sanctions could lead to a substantial reduction in Iran’s oil exports, potentially cutting up to 1 million barrels per day, depending on the enforcement’s strictness and global compliance.

Iranian crude exports to China have increased this year, but the sanctions may compel Chinese firms to reduce or halt purchases to avoid U.S. penalties. This would likely drive a search for alternative crude sources to sustain China’s refining operations, thereby adding further support to the current upward pressure on crude prices. This, together with the likelihood of OPEC+ continuing to delay their planned production increase, reinforces our view of limited downside risks to prices in the near term – caution remains reasonable, and we continue to favor a cautiously long position.

Since last Friday’s close at USD 75.4 per barrel, Brent crude prices have experienced a steady decline over the week, bringing an end to the upward momentum observed since mid-November. Trading has been marked by volatility, highlighted by a sharp sell-off on Monday afternoon (CEST), which was driven by reduced geopolitical uncertainty. As of now, Brent crude has dropped USD 2.9 per barrel this week and is trading at USD 72.5 per barrel.

Geopolitical developments have played a pivotal role in shaping market sentiment this week. Israel and Lebanon have reached the terms of an agreement to end the Israel-Hezbollah conflict. The current cease-fire has alleviated some of the geopolitical tensions in the region, reducing some of the risk premium that had supported crude prices in recent weeks.

On the supply side, OPEC+ has introduced new uncertainties by delaying its upcoming meeting, which was originally scheduled for Sunday, December 1st. The group is set to deliberate on whether to revive production cuts by implementing a scheduled supply increase of 180,000 barrels per day (to begin with). However, signals from OPEC+ delegates earlier this week indicate ongoing discussions about postponing this move, potentially for several months. This delay aligns with a cautious market outlook, as global demand remains subdued, leaving little room for additional OPEC+ barrels in the market. The cartel appears acutely aware of the delicate balance, avoiding actions that could oversupply the market.

Meanwhile, speculation surrounding a potential surge in US oil production – up 3 million barrels per day – has gained attention. Such a ramp-up could drive crude prices below USD 50 per barrel but is considered unrealistic. US producers understand the strategic risks involved, particularly with OPEC+ holding an estimated 5–6 million barrels of spare capacity. A significant production increase by the US would likely provoke a strong response from OPEC+, potentially flooding the market to protect market share. Such a scenario would lead to sharp price declines, ultimately punishing US production rather than fostering growth. This dynamic makes the proposed ramp-up highly unlikely.

Inventory data from the US DOE further highlights the tight supply conditions in the market. Commercial crude inventories (excl. SPR) declined by 1.8 million barrels week-on-week, bringing total stocks to 428.4 million barrels. While smaller than the 5.9-million-barrel draw estimated by the API, inventories remain approximately 5% below the five-year average for this time of year.

Refined product inventories presented a mixed picture. Gasoline inventories increased by 3.3 million barrels (compared to API’s estimate of 1.8 million barrels), yet they remain 3% below the five-year average. Similarly, distillate inventories (diesel) rose by 0.4 million barrels but are still 5% below the five-year norm, contrasting with API’s estimate of a 2.5-million-barrel build. The modest crude draw continues to signal tight market conditions, particularly when combined with overall low inventory levels across petroleum products.

Refinery operations also provided important insights. US refinery inputs averaged 16.3 million barrels per day, with facilities operating at 90.5% capacity. Crude imports declined sharply, averaging 6.1 million barrels per day, down 1.6 million barrels compared to the previous week. Over the past four weeks, total product supply – a key indicator of demand – averaged 20.4 million barrels per day, representing a 1% year-on-year increase. Gasoline demand remained steady, while distillate fuel demand declined by 3.4%, and jet fuel demand rose by 3.3%.

Despite this week’s bearish price action, the decline in US crude inventories, albeit smaller than expected, signals that market fundamentals remain somewhat tight and capping the downside to prices. Additionally, the drop in total commercial petroleum inventories – down by 1.8 million barrels last week – further underscores this. US inventories, alongside ongoing geopolitical developments and OPEC+ decisions, will continue to dominate the crude oil narrative in the coming weeks.

Brent crude prices have remained stable since the sharp price surge on Monday afternoon, when the price jumped from USD 71.5 per barrel to USD 73.5 per barrel – close to current levels (now trading at USD 73.45 per barrel). The initial price spike was triggered by short-term supply disruptions at Norway’s Johan Sverdrup field and Kazakhstan’s Tengiz field.

While the disruptions in Norway have been resolved and production at Tengiz is expected to return to full capacity by the weekend, elevated prices have persisted. The market’s focus has now shifted to heightened concerns about an escalation in the war in Ukraine. This geopolitical uncertainty continues to support safe-haven assets, including gold and government bonds. Consequently, safe-haven currencies such as the U.S. dollar, Japanese yen, and Swiss franc have also strengthened.

U.S. commercial crude oil inventories (excl. SPR) increased by 0.5 million barrels last week, according to U.S DOE. This build contrasts with expectations, as consensus had predicted no change (0.0 million barrels), and the API forecast projected a much larger increase of 4.8 million barrels. With last week’s build, crude oil inventories now stand at 430.3 million barrels, yet down 18 million barrels(!) compared to the same week last year and ish 4% below the five-year average for this time of year.

Gasoline inventories rose by 2.1 million barrels (still 4% below their five-year average), defying consensus expectations of a slight draw of 0.1 million barrels. Distillate (diesel) inventories, on the other hand, fell by 0.1 million barrels, aligning closely with expectations of no change (0.0 million barrels) but also remain 4% below their five-year average. In total, combined stocks of crude, gasoline, and distillates increased by 2.5 million barrels last week.

U.S. demand data showed mixed trends. Over the past four weeks, total petroleum products supplied averaged 20.7 million barrels per day, representing a 1.2% increase compared to the same period last year. Motor gasoline demand remained relatively stable at 8.9 million barrels per day, a 0.5% rise year-over-year. In contrast, distillate fuel demand continued to weaken, averaging 3.8 million barrels per day, down 6.4% from a year ago. Jet fuel demand also softened, falling 1.3% compared to the same four-week period in 2023.