Analys
Market vs. IEA: An implied demand diff of more than 3 m b/d for July

Oil sells off as Goldman gives up on USD 95/b end-of-year. The front-month Brent contract traded to a high of USD 78.73/b last Monday in response to the unilateral surprise cut of 1 m b/d for July by Saudi Arabia. Since then the oil price has ticked gradually lower. This morning it is down 1.6% to USD 73.6/b for no other obvious reason as far as we can see than that Goldman has given up on its USD 95/b end-of-year target and replaced it with USD 86/b.

The market is not at all buying into a 2-3 m b/d deficit in Q3-23. In its latest oil market report (OMR) the IEA projects that the world will need 30.5 m b/d from OPEC in H2-23 as the world will consume 103 m b/d in Q3-23 vs. 100.6 m b/d in Q4-22. OPEC produced 28.25 m b/d in May. In July it will produce about 27.25 m b/d when we factor in the unilateral cut by Saudi Arabia. If the IEA is correct in its demand assessment then we should get a global inventory draw of close to 100 m barrels in July alone. And yet more from August onward if the cuts are maintained. The current sell-off in oil is an implied assumption by the market that oil inventories will build in July. Demand needs to be below 100 m b/d for that to happen. I.e. there is an implied diff. on demand in July between the IEA and the market of more than 3 m b/d.
”I don’t believe it before I see it”. But the market is obviously not buying into this projection (global demand = 103.0 m b/d in Q3-23) at all. Instead oil is selling off in the face of Saudi July cuts, Saudi July price hikes (OSPs) and large deficit projections by the IEA. Is this some kind of EV-psychosis where the world has stopped using oil, or is it a deep, deep concern for the global economy due to the exceptional sharp interest rate rise by the US over the past year? Probably mostly the latter with the fear or expectation that more economic trouble and pain is in store for the US and the global economy for the coming 6-12 months. For the moment the market is practicing an attitude to the oil market of ”I don’t believe it before I see it”. I.e. we need to see the projected deficit actually take place and trans-pond to sharp inventory draws before the market will believe in the projected deficit.
The market has doubt about demand, but it shouldn’t doubt Saudi Arabia’s determination. Saudi Arabia has lifted its Official Selling Prices (OSPs) for July by 45 cents/b for all grades. Not only is Saudi Arabia reducing supply by 1 m b/d in July. It is lifting its prices as well. The effect of this is that it will push its term-buyers to buy more in the global spot market thereby firming up that market and in effect the spot oil prices. Saudi Arabia is not new to this game. It knows exactly what to do to get its way. The market may not believe in strong demand. But it should not doubt strong action by Saudi/OPEC. Vishnu Varathan (Mizuho Bank) is pointing out in a Blbrg comment that current selloff is an implicit assumption by the market that bearish demand developments will overwhelm Saudi’s ability to raise prices. The market needs to remember though the 9.7 m b/d cut in production by OPEC+ in the spring of 2020. The capacity, willingness and ability to cut deep when needed is there. For now it looks like Saudi is going it alone, but that won’t be for long.
De-stocking the global oil supply chain. When the physical oil market participants are fearing, expecting or experiencing lower demand and bad economic times to come they will typically run lean and mean. They will halt or reduce purchases of crude and products and instead draw down their internal inventories in expectation that demand will be bad and prices will be lower down the road. I.e. the whole industrial oil supply chain will de-stock with the result that inventories of crude and products at the hubs will rise and prices will be pushed lower. Its kind of a self fulfilling dynamic. But it also means that when the market turns then supply chains can be quite dry and thus the rebound equally stronger.
Saudi Arabia has lifted its official selling prices for July by 45 cents per barrel

Saudi Arabia has lifted its official selling prices for July by 45 cents per barrel

Net long specs in Brent and WTI in million barrels stays at very low level.

Brent crude forward curve structure has moved mostly sideways

Analys
Crude stocks fall again – diesel tightness persists

U.S. commercial crude inventories posted another draw last week, falling by 2.4 million barrels to 418.3 million barrels, according to the latest DOE report. Inventories are now 6% below the five-year seasonal average, underlining a persistently tight supply picture as we move into the post-peak demand season.

While the draw was smaller than last week’s 6 million barrel decline, the trend remains consistent with seasonal patterns. Current inventories are still well below the 2015–2022 average of around 449 million barrels.
Gasoline inventories dropped by 1.2 million barrels and are now close to the five-year average. The breakdown showed a modest increase in finished gasoline offset by a decline in blending components – hinting at steady end-user demand.
Diesel inventories saw yet another sharp move, falling by 1.8 million barrels. Stocks are now 15% below the five-year average, pointing to sustained tightness in middle distillates. In fact, diesel remains the most undersupplied segment, with current inventory levels at the very low end of the historical range (see page 3 attached).
Total commercial petroleum inventories – including crude and products but excluding the SPR – fell by 4.4 million barrels on the week, bringing total inventories to approximately 1,259 million barrels. Despite rising refinery utilization at 94.6%, the broader inventory complex remains structurally tight.
On the demand side, the DOE’s ‘products supplied’ metric – a proxy for implied consumption – stayed strong. Total product demand averaged 21.2 million barrels per day over the last four weeks, up 2.5% YoY. Diesel and jet fuel were the standouts, up 7.7% and 1.7%, respectively, while gasoline demand softened slightly, down 1.1% YoY. The figures reflect a still-solid late-summer demand environment, particularly in industrial and freight-related sectors.


Analys
Increasing risk that OPEC+ will unwind the last 1.65 mb/d of cuts when they meet on 7 September

Pushed higher by falling US inventories and positive Jackson Hall signals. Brent crude traded up 2.9% last week to a close of $67.73/b. It traded between $65.3/b and $68.0/b with the low early in the week and the high on Friday. US oil inventory draws together with positive signals from Powel at Jackson Hall signaling that rate cuts are highly likely helped to drive both oil and equities higher.

Ticking higher for a fourth day in a row. Bank holiday in the UK calls for muted European session. Brent crude is inching 0.2% higher this morning to $67.9/b which if it holds will be the fourth trading day in a row with gains. Price action in the European session will likely be quite muted due to bank holiday in the UK today.
OPEC+ is lifting production but we keep waiting for the surplus to show up. The rapid unwinding of voluntary cuts by OPEC+ has placed the market in a waiting position. Waiting for the surplus to emerge and materialize. Waiting for OECD stocks to rise rapidly and visibly. Waiting for US crude and product stocks to rise. Waiting for crude oil forward curves to bend into proper contango. Waiting for increasing supply of medium sour crude from OPEC+ to push sour cracks lower and to push Mid-East sour crudes to increasing discounts to light sweet Brent crude. In anticipation of this the market has traded Brent and WTI crude benchmarks up to $10/b lower than what solely looking at present OECD inventories, US inventories and front-end backwardation would have warranted.
Quite a few pockets of strength. Dubai sour crude is trading at a premium to Brent crude! The front-end of the crude oil curves are still in backwardation. High sulfur fuel oil in ARA has weakened from parity with Brent crude in May, but is still only trading at a discount of $5.6/b to Brent versus a more normal discount of $10/b. ARA middle distillates are trading at a premium of $25/b versus Brent crude versus a more normal $15-20/b. US crude stocks are at the lowest seasonal level since 2018. And lastly, the Dubai sour crude marker is trading a premium to Brent crude (light sweet crude in Europe) as highlighted by Bloomberg this morning. Dubai is normally at a discount to Brent. With more medium sour crude from OPEC+ in general and the Middle East specifically, the widespread and natural expectation has been that Dubai should trade at an increasing discount to Brent. the opposite has happened. Dubai traded at a discount of $2.3/b to Brent in early June. Dubai has since then been on a steady strengthening path versus Brent crude and Dubai is today trading at a premium of $1.3/b. Quite unusual in general but especially so now that OPEC+ is supposed to produce more.
This makes the upcoming OPEC+ meeting on 7 September even more of a thrill. At stake is the next and last layer of 1.65 mb/d of voluntary cuts to unwind. The market described above shows pockets of strength blinking here and there. This clearly increases the chance that OPEC+ decides to unwind the remaining 1.65 mb/d of voluntary cuts when they meet on 7 September to discuss production in October. Though maybe they split it over two or three months of unwind. After that the group can start again with a clean slate and discuss OPEC+ wide cuts rather than voluntary cuts by a sub-group. That paves the way for OPEC+ wide cuts into Q1-26 where a large surplus is projected unless the group kicks in with cuts.
The Dubai medium sour crude oil marker usually trades at a discount to Brent crude. More oil from the Middle East as they unwind cuts should make that discount to Brent crude even more pronounced. Dubai has instead traded steadily stronger versus Brent since late May.

The Brent crude oil forward curve (latest in white) keeps stuck in backwardation at the front end of the curve. I.e. it is still a tight crude oil market at present. The smile-effect is the market anticipation of surplus down the road.

Analys
Brent edges higher as India–Russia oil trade draws U.S. ire and Powell takes the stage at Jackson Hole

Best price since early August. Brent crude gained 1.2% yesterday to settle at USD 67.67/b, the highest close since early August and the second day of gains. Prices traded to an intraday low of USD 66.74/b before closing up on the day. This morning Brent is ticking slightly higher at USD 67.76/b as the market steadies ahead of Fed Chair Jerome Powell’s Jackson Hole speech later today.

No Russia/Ukraine peace in sight and India getting heat from US over imports of Russian oil. Yesterday’s price action was driven by renewed geopolitical tension and steady underlying demand. Stalled ceasefire talks between Russia and Ukraine helped maintain a modest risk premium, while the spotlight turned to India’s continued imports of Russian crude. Trump sharply criticized New Delhi’s purchases, threatening higher tariffs and possible sanctions. His administration has already announced tariff hikes on Indian goods from 25% to 50% later this month. India has pushed back, defending its right to diversify crude sourcing and highlighting that it also buys oil from the U.S. Moscow meanwhile reaffirmed its commitment to supply India, deepening the impression that global energy flows are becoming increasingly politicized.
Holding steady this morning awaiting Powell’s address at Jackson Hall. This morning the main market focus is Powell’s address at Jackson Hole. It is set to be the key event for markets today, with traders parsing every word for signals on the Fed’s policy path. A September rate cut is still the base case but the odds have slipped from almost certainty earlier this month to around three-quarters. Sticky inflation data have tempered expectations, raising the stakes for Powell to strike the right balance between growth concerns and inflation risks. His tone will shape global risk sentiment into the weekend and will be closely watched for implications on the oil demand outlook.
For now, oil is holding steady with geopolitical frictions lending support and macro uncertainty keeping gains in check.
Oil market is starting to think and worry about next OPEC+ meeting on 7 September. While still a good two weeks to go, the next OPEC+ meeting on 7 September will be crucial for the oil market. After approving hefty production hikes in August and September, the question is now whether the group will also unwind the remaining 1.65 million bpd of voluntary cuts. Thereby completing the full phase-out of voluntary reductions well ahead of schedule. The decision will test OPEC+’s balancing act between volume-driven influence and price stability. The gathering on 7 September may give the clearest signal yet of whether the group will pause, pivot, or press ahead.
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