More downside short term – Turn to bullish in mid-November

Brent crude shed 4.2% yesterday closing at $76.44/bl. It has traded slightly to the upside this morning but more downside seems likely in the short term. Bloomberg consensus is that US crude stocks fell 3.7 million barrels last week with EIA data due today at 16:30 CET. Member data from US API last night however indicated a 9.9 million barrel increase in US crude stocks last week. Over the past three week U.S. crude stocks increased by an average of 7 million barrels per week. Inventories do normally increase at this time of year but only by some 3 million barrels per week as refineries turn around their machines for winter operations. One key reason for the strong increase in U.S. crude stocks currently is the fact that export pipelines are full while domestic production continues to increase. It is thus good reason to expect that U.S. crude stocks continued to increase some 4 million barrels above the seasonal norm. I.e. we should expect data today at 16:30 CET to show a crude stock build of around 7 million barrels last week. This will likely push both the WTI price and the Brent crude oil price further down today.

Bjarne Schieldrop, Chief analyst commodities

The bearish crude oil price action yesterday was clearly impacted by bearish equity markets, falling 10 year interest rates, rising gold prices and a clear risk-off sentiment. The bearish oil market sentiment was in addition impacted by bearish oil talk by the Saudi Arabian energy minister Khalid Al-Falih who highlighted how Saudi Arabia could increase production both to 11 m bl/d and to 12 m bl/d if needed. The phrasing hade a very clear bearish touch to it in our view.

Mohammed bin Salman (MbS) is in a tough situation at the moment though not at all as tough a situation as Jamal Khashoggi who is actually dead. Since he came to power in 2017 he has consolidated his power, eliminated his rivals and side stepped government institutions and channelled all control into his own hands. MbS has taken very active, direct charge since he came to power (2017). There is no evidence yet tying MbS directly to the liquidation of Jamal Khashoggi though there are probably few who doubt that he was explicitly behind the matter.

MbS is today the ruling prince in Saudi Arabia but he is still not actually the king. He is not either really guaranteed to become the next king. The current ruling king in Saudi Arabia, the 82 year old King Salman bin Abdulaziz Al Saud can still appoint another prince to follow in his footsteps.

As such the communication from the Turkish pm Erdogan is interesting. In yesterday’s media message he did not mention the ruling prince MbS by a word but he praised the ruling king in Saudi Arabia and emphasized that the people behind the killing of Jamal Khashoggi must be taken to court and punished. To us this reads like trying to get MbS out of the way.

MbS today needs his remaining supporters more than ever. His future as king is probably at stake. As such we believe that he now listens much more carefully to Donald Trump’s call for more oil and a lower oil price in the run-up to the US mid-term election on November 6. It is in this context that we interpret Khalid Al-Falih’ bearish oil statement yesterday.

For the time being and the next 2-3 weeks during US refinery turnarounds we’ll have rising US crude stocks. We are also likely to get a further strengthening in the USD (normally strong seasonal dollar gains in November) which likely will hurt emerging market equities and currencies which again is negative for commodities in general. In addition we are also likely to get further bearish verbal intervention Khalid Al-Falih.

We expect most of this to turn to bullish again around mid-November. Donald Trump really wants a fairly high oil price since it creates both US oil independence and a lot of jobs. So after November 6 we are unlikely to hear any more bearish oil talk from him. MbS now also needs a higher oil price more than ever given the loss of friends, supporters as well as backing from international finance so bearish Saudi oil talk should also be a thing of the past. Normally US crude stocks should start to decline again in November though uncertain due to the full export pipelines. In addition the Iran sanctions will likely start to materialize in the form of declining oil inventories some time in November as US sanctions towards Iran fully kicks in on November 4. In general the Brent crude oil market looks tight spot wise but a bearish WTI currently helps to drive all oil benchmarks lower. But contango and rising crude stocks is really primarily in the US.