Brent crude jumped as much as 5.5% yesterday before it closed at USD 77.62/b (+5%). That is up USD 9/b since the recent low-point of USD 68.68/b on 10 Sep which was the lowest Brent price since December 2021. The jump yesterday was fueled by Biden saying that attacks on Iranian oil infrastructure was under discussion as a response to the 200 ballistic missiles Iran fired at Israel on Tuesday. Brent price this morning is mostly unchanged.

While we have seen a strong rebound in the oil price lately, the current price of USD 77.6/b is still below its close in August of USD 78.8/b and also well below the USD 80-85/b where Brent has comfortably been trading for more than 18 months. One should think that the latest escalation in the Middle East would have forced some short-covering of more than 250 mb of short oil positions in Brent and WTI. But so far at least not enough to spur Brent crude back to USD 80/b.

It is now almost one year since the Oct 7 attack on Israel. And so far the market has not lost a single drop of oil. The most severe impact on the oil market so far is the rerouting of oil around Africa due to Houthis firing rockets at ships in the Red Sea. 

While Mid-East tensions are running high, the oil market is still deeply concerned about weak demand and a surplus oil in 2025. OPEC+ this week again confirmed that they will lift production by 180 kb/d in December. The plan is for a monthly increase by this amount for 12 months to November 2025. But even if they do lift production in December, it doesn’t necessarily mean that they will lift also in January. That remains to be decided. Saudi Arabia is clearly frustrated by the fact that Iraq, Kazakhstan and Russia haven’t complied fully with agreed quotas. And if your teammates do not play by the agreed rules, then how can you keep on playing. But they still have October and November to show that they are good palls.

Libya is also set to revive production in the coming days. Its production tumbled to less than 450 kb/d in August and averaged 600 kb/d in September. It will likely return back to around 1.2 mb/d rather quickly as internal political disagreements have been ironed out for now.

Ahead of us however is still the retaliatory attack by Iran on Israel. All options are probably weighted and Israel naturally have a long list of possible targets already made out. Which to choose? Oil installations? Other economic targets? Military installations? Nuclear facilities?,.. It is a fine balance. A forceful retaliation, but not so strong that it leads to an uncontrollable tit-for-tat escalation. Israel may utilize the situation to hit Iranian nuclear installations now that Hezbollah is partially sidelined.

Our expectations are that the Israeli retaliation will come rather quickly and probably before Oct 7. It probably won’t hit oil installations. Most likely it will hit military installations. Possibly Iran’s nuclear facilities. But if the later are hit then we are in for a real tit-for-tat escalation. 

If all of Iran’s oil export capacity was to be taken out, then the world would lose around 1.7 mb/d of Iranian crude oil exports plus some 0.5 mb/d of condensate exports. OPEC+ now holds a spare capacity of 5-6 mb/d with Saudi Arabia alone able to lift production by 2-3 mb/d. UAE, Iraq and Kuwait can probably lift production by 1.5 to 2.0 mb/d and Russia by 1.0 mb/d. So world would not go dry for oil even if Iran’s oil exports are fully taken out. But spare capacity would be much lower and that would lift the oil price higher. But if Iran’s exports were taken out then we are talking full turmoil around the Strait of Hormuz. And the oil price would jump considerably and above USD 100/b as the risk of further escalation which might impact exports out of the Strait of Hormuz which carries close to 20% of all oil consumed in the world.

The rule of thumb in commodity markets is that if supply is severely restricted then the price will often spike to 5-10x its normal level. Most recent examples of this is global LNG prices which spiked to USD 385/boe when Russia chocked off gas supplies to Europe. So if worst came to worst and the Strait of Hormuz was closed for a month or more then Brent crude would likely spike to USD 350/b, the world economy would crater and the oil price would fall back to below USD 200/b again over some time. But the risk for this currently seems very remote and both the US and China would likely move in to try to reopen the Strait if it was closed. But when rockets are flying left, right and center, it is not so easy. But seeing where the oil price sits right now the market doesn’t seem to hold much probability for such a development at all.

But it is not so long ago that world markets were taken completely off-guard by the developments in Russia/Ukraine. So while probabilities for worst case scenarios are very low, everyone are still biting nails for what will happen the coming days as we await the retaliatory attack by Israel on Iran.

Brent crude prices have dropped by roughly USD 2 per barrel (2.5%) following Saudi Arabia’s shift towards prioritizing production volume over price. The Brent price initially tumbled by nearly USD 3 per barrel, reaching a low of USD 70.7 before recovering to USD 71.8. The market is reacting to reports suggesting that Saudi Arabia may abandon its unofficial USD 100 per barrel target to regain market share, aligning with plans to increase output by 2.2 million barrels per day starting in December 2024.

This move, while not yet officially confirmed, signals a stronger commitment from Saudi Arabia to boost supply, despite market expectations that they might delay the increase if prices remained below USD 80. If confirmed by the Saudi Energy Ministry, further downward pressure on prices is expected, as the market is already pricing in this potential increase.

For months, the market has been skeptical about whether Saudi Arabia would follow through with the production increase, but the recent rhetoric indicates that the Kingdom may act on its initial plan. The decision to increase production is likely motivated by a desire to regain market share, especially as OPEC+ continues to carefully manage output levels.

The latest US DOE report revealed a bullish drawdown of 4.5 million barrels in U.S. crude inventories, now 5% below the five-year average. Gasoline and distillate stocks also saw decreases of 1.5 million and 2.2 million barrels, respectively, both sitting significantly below seasonal averages. Total commercial petroleum inventories plummeted by 14.6 million barrels last week, signaling some continued tightness in the US here and now.

U.S. refinery inputs averaged 16.4 million bpd, a slight reduction from the previous week, with refineries operating at 90.9% capacity. Gasoline production rose to 9.8 million bpd, while distillate production dipped to 4.9 million bpd. Although crude imports rose to 6.5 million bpd, the four-week average remains 9.5% lower year-on-year, reflecting softer U.S. imports.

In terms of US demand, total products supplied averaged 20.3 million bpd over the past four weeks, a 1.4% decline year-over-year. Gasoline demand saw a slight uptick of 2.1%, while distillate and jet fuel demand remained relatively flat.

The easing of geopolitical tensions between Israel and Hezbollah has also contributed to the recent price dip, with hopes for a potential ceasefire easing regional risk concerns. Additionally, uncertainty persists around the impact of China’s monetary easing on future demand growth, adding further downward pressure on prices.

Brent crude prices have risen by USD 2.75 per barrel (3.7%) since the start of the week, now trading at USD 74.5 per barrel. This price jump follows significant macroeconomic developments, most notably the Federal Reserve’s decision to implement a “larger” rate cut of 0.50 percentage points, bringing the target range to 4.75-5.00%. The move, driven by progress in managing inflation, reflects the Fed’s shift in focus towards supporting the labor market and the broader economy. Initially, the announcement led to market optimism, boosting stock prices and weakening the US dollar. However, equity markets quickly reversed as concerns grew that the aggressive cut might signal deeper economic issues.

In the oil market, the softer monetary policy outlook has fostered expectations of stronger future demand, supporting a more likely bullish outlook for crude prices further out. Despite this, speculative positions remain heavily short, particularly amid ongoing worries about China’s economic recovery, as highlighted in recent comments. Still, there are near-term signals of increased Chinese crude purchases, helping to mitigate some of the market’s demand-related concerns.

On the supply side, US commercial crude oil inventories decreased by 1.6 million barrels last week, defying the API’s forecast of a 2-million-barrel increase (see page 12 attached). Gasoline and distillate inventories saw minimal changes, underscoring the persistent market tightness. OPEC+, led by Saudi Arabia, continues to play a pivotal role in stabilizing prices through prolonged production cuts, maintaining discipline (so far) in the wake of uncertainty around global demand. Despite tightness in the short term, broader demand fears, especially regarding China, are limiting more significant price increases.

Beyond inventory draws and the Fed’s double rate cut, escalating tensions in the Middle East have also contributed to the recent uptick in the oil price. Israel’s defense minister declared a “new phase” in its regional conflict, sparking concerns of a broader confrontation that could potentially involve Iran, a key OPEC producer.

Despite the recent price gains, Brent crude is still on track for its largest quarterly loss of the year, driven by China’s slowdown and ample global supply. Data from the DOE highlighted weaker demand for diesel (down 0.9% year-on-year) and jet fuel (down 1.4% year-on-year), while gasoline demand saw a slight 1.1% uptick but remained below 9 million barrels per day. However, shrinking US inventories are expected to support further price increases. Crude inventories at the Cushing, Oklahoma, in particular, are well below (!!) the five-year seasonal average, nearing critical low levels.