Oil\u2019s price drop Tuesday to the lowest finish in three-and-a-half months may come as a surprise to traders focused on the risk of crude supply disruptions in the Middle East, but not so much to those who have assessed the latest global economic data.<\/p>\n
Some economic data have pointed to the potential for a slowdown in energy demand.<\/p>\n
\n
On Tuesday, oil prices fell on the back of a slowdown in China\u2019s oil demand, which has come not only because of lower than expected economic growth, but because of lower exports of petroleum products, said Anas Alhajji, an independent energy expert and managing partner at Energy Outlook Advisors.<\/p>\n
China trade data show that the country imported 13.5% more crude in October than a year ago, according to news reports, but the year-ago figure was low due to coronavirus restrictions that were in place in 2022.<\/p>\n
On its own, the crude-oil import data are bullish, but that is \u201cnot the case when we look at inventories, exports, and refinery runs,\u201d said Alhajji. \u201cRefinery throughputs are declining, inventories are rising, and exports are decreasing.\u201d<\/p>\n
In short, looking at the fourth quarter, Chinese data are becoming more \u201cneutral than bullish,\u201d he said, though a change in government policy can \u201creturn it to bullish.\u201d<\/p>\n
Exports have been declining because refineries ran out of government export quotas, Alhajji said. \u00a0Without additional quotas, or allowances, exports are expected to decline, resulting in \u201clower crude imports or higher inventories, or both,\u201d he said.<\/p>\n
China\u2019s refinery utilization also declined in October as a result of \u201crunning out of quota and thin margins,\u201d and refinery runs are expected to remain weak until trends are reversed, said Alhajji. \u00a0<\/p>\n
On Tuesday, the December futures contract for U.S. benchmark West Texas Intermediate oil
\n CLZ23,
\n +0.33%<\/bg-quote><\/p>\n CL.1,
\n +0.33%<\/bg-quote>
\n fell by $3.45, or 4.3%, to settle at $77.37 a barrel on the New York Mercantile Exchange. Global benchmark Brent crude saw its January contract
\n BRNF24,
\n -0.11%<\/bg-quote><\/p>\n BRN00,
\n -0.11%<\/bg-quote>
\n fall $3.57, or 4.2%, to $81.61 a barrel on ICE Futures Europe. <\/p>\nBoth WTI and Brent oil futures settled at their lowest since July 21, according to Dow Jones Market Data. <\/p>\n
Global supplies<\/h2>\n
The EIA, meanwhile, in its monthly November Short-term Energy Outlook report released Tuesday, forecast growth in global oil production next year, but also said it expects ongoing cuts by the Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, to \u201ckeep global production growth lower than global consumption growth.\u201d<\/p>\n
The OPEC+ cuts are also likely to \u201ccontribute to inventory draws and upward oil price pressure\u201d in the early part of 2024, the government agency said. <\/p>\n
The voluntary production cuts from Saudi Arabia and ongoing output cuts from other OPEC+ countries raised OPEC\u2019s spare oil production capacity to a forecast 4.3 million barrels a day in 2024, from 2.4 million barrels a day in 2022, the EIA said. <\/p>\n
Heightened uncertainty around the recent the attacks on Israel, and the potential for tensions spreading to a wider area in the Middle East, \u201cposes risk to oil supply, including available surplus production capacity,\u201d it said. The EIA said it hasn\u2019t materially changed its oil production forecast for countries in the Middle East, but also pointed out that the \u201cgeopolitical situation could change rapidly.\u201d <\/p>\n
U.S. output and demand<\/h2>\n
Over in the U.S., oil demand remains weak and lower than last year, while some European countries are \u201calready in recession,\u201d Alhajji said.<\/p>\n
U.S. petroleum production has held ground at a record level for weeks, with output at 13.2 million barrels a day as of the week ended Oct. 27, according to weekly data from EIA. <\/p>\n
The EIA\u2019s monthly energy outlook report forecast 2023 U.S. oil output at an average of 12.9 million barrels a day, down 0.1% from the October forecast. It expects next year\u2019s domestic output at 13.15 million barrels a day, up 0.2% from the previous forecast. <\/p>\n
Read:<\/strong> U.S. oil production hits record as Israel-Hamas conflict stokes global supply fears<\/p>\nWhen it comes to demand for products refined from oil, the EIA said that next year, it expects U.S. motorists to consume less gasoline per capita, which would result in the lowest gasoline consumption in two decades, it said. <\/p>\n
\u201cU.S. motorists are driving less because they aren\u2019t commuting to work every day, newer gasoline-fueled vehicles are more efficient, and there are more electric vehicles on the road,\u201d EIA Administrator Joe DeCarolis said in a statement on the release of the energy outlook report. \u201cPut those trends together with high gasoline prices and high inflation, and we find that U.S. motorists are using less gasoline.\u201d<\/p>\n
Troy Vincent, senior market analyst at DTN, however, said the bearishness in oil isn\u2019t all about refined product demand weakness.<\/p>\n
The bearishness has a lot to do with what \u201cend of winter refined product balances could look like if we have an El Ni\u00f1o-inspired winter weather pattern that spares U.S. refiners from unplanned outages\u201d like the ones they have suffered over the past two winters,\u201d said Vincent.<\/p>\n
That also implies far more refined product supply hitting the market, which should weigh on refining margins moving into the spring, he said. <\/p>\n
Price risks<\/h2>\n
For now, the \u201creality\u201d is that crude prices ran up nearly $10 a barrel on the back of a geopolitical crisis that \u201cdidn\u2019t impact oil supply,\u201d Vincent told MarketWatch. <\/p>\n
While the risk of the war spreading and becoming a more widespread regional crisis that could have impacted oil supply was \u201creal, it was also low,\u201d he said. The U.S. administration has been \u201cworking tirelessly to make sure that didn\u2019t happen.\u201d <\/p>\n
And following an \u201cuneventful speech\u201d by Hezbollah chief Hassan Nasrallah a few days ago, the geopolitical risk premium continued to fade,\u201d said Vincent. <\/p>\n
Now, the market is \u201cgetting back to staring down fundamentals and is seeing Russia push more oil onto the global market and Chinese appetite for crude rolling over as refining margins are dropping and refiners have exhausted their product export quotas,\u201d he said. <\/p>\n
<\/p>\n
<\/p>\n
\n
\n \u201c<\/span>The market will enter 2024 \u201cwith a lower price than OPEC had anticipated and a persistent large spare capacity buffer that limits upside risk in the event of some unforeseen supply disruption.\u201d \u201d<\/span>\n <\/p>\n
\n \u2014 Troy Vincent, DTN<\/span>
\n <\/small><\/p><\/div>\n<\/p><\/div>\nWhile OPEC is likely to continue to extend their supply cuts into 2024, that should \u201cnow be assumed as the base case and likely offers little upside for prices,\u201d said Vincent. <\/p>\n
This means the market will enter 2024 \u201cwith a lower price than OPEC had anticipated, and a persistent large spare capacity buffer that limits upside risk in the event of some unforeseen supply disruption,\u201d he said.<\/p>\n<\/p><\/div>\n
Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Oil\u2019s price drop Tuesday to the lowest finish in three-and-a-half months may come as a surprise to traders focused on the risk…<\/p>\n","protected":false},"author":1,"featured_media":11884,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[24],"tags":[],"class_list":{"0":"post-11883","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-investment"},"yoast_head":"\n
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