Oil Markets Lessen Geopolitical Risk While Oversupply Concerns Remain

Oil – Fundamental Analysis

Crude prices fell to the lowest levels since the first week in May as geopolitical risk factors lessened and as another large gain in oil inventories was reported. The critical $60./bl. support mark for WTI was breached and a key technical indicator is now signaling that prices have moved too far below their recent average. The US grade was as high as $62.90/bl. on Tuesday and as low as $58.70/bl. on Friday, having broken to the downside of the Lower-Bollinger Band limit at $$59.50. Brent crude hit its high on Thursday at $66.60/bl. with its low of $62.85/bl. occurring Friday as well. Both grades settled much lower week-on-week. The WTI/Brent spread has widened to ($4.25).

The announcement of a ceasefire agreement between Israel and Hamas has taken some of the geopolitical risk premium out of the crude markets temporarily. Israel has begun removing some troops from parts of Gaza as a hostage exchange is set to take place. However, past ceasefires have been violated by one side or the other.

The Trump Administration continues to play tariff “hardball” with Iran and China, sanctioning a product export terminal in Iran and another refiner in China. The tariff issue continues to be viewed as a negative for global economic growth which is also bearish for oil prices. In a counter move, China, which buys about 1.4 to 1.6 million bld. from Iran, is proposing to compensate Iran with infrastructure projects rather than a transfer of cash to circumvent the tariffs. And, despite the imposition of an additional +50% tariff on imports from India by the US, they are expected to increase the amount of oil imported from Russia over the coming months. Russia was actually able to raise its output in September to 9.4 million bld. but still did not meet its OPEC+ quota.

Meanwhile, China buying oil for its stockpiles since the start of the year has aided an otherwise bleak global demand picture as it has helped offset the OPEC+ output increases to some extent. How long this “underlying” 1.0 million bld. market will remain has yet to be seen. And analysts are speculating that OPEC+ has very little “spare” capacity to meet its latest output goals which could indicate a market that will be short down-the-road. The announced output increase from the group for November matched October’s +137k bld. while early assessments were double that amount.

Crude prices in Canada continue to improve as a result of the TransMountain pipeline’s deliveries to its west coast where volumes are exported to Asia. Canada’s Prime Minister Carney met with Trump this week and the subject of reviving the canceled Keystone XL pipeline was discussed. The proposed TC Energy 850k bld. project was sold and the new owners have no interest in pursuing it at this point.

Tanker-tracker, Vortexa, is reporting that there are about 1.2 billion bl. of oil currently in transit around the globe which is the most seaborne crude since 2016. And that doesn’t account for so-called “floating” oil storage where tankers sit offshore waiting to unload or to be sold.
The Energy Information Administration’s Weekly Petroleum Status Report (still released despite the government shut-down) indicated that commercial crude oil inventories for last week increased by +3.7 million bl. to a total of 420 bl. million and -4% below the 5-year average. The API forecasted a -2.7 million bl. drop while market analysts forecasted a +0.7 million increase. US refinery utilization rose to 92.4% from 91.4%, representing a +130k bpd. change in inputs to 16.3 million bpd. Total motor gasoline stocks fell -1.6 million bl. to 219 million bl. and -1% below the 5-year average. Gasoline demand was +400k bpd to 8.9 million bpd. vs. 8.5 the week prior and 9.6 a year ago. Distillates decreased -2.0 million bl. to 121.6 million Bbl. and are now at -6% below the 5-year average. Inventory at the key Cushing, OK hub changed -760k Bbl. to 22.7 million Bbl. or 30% of capacity. The SPR was +285k bbl. to 407 million bbl. Imports of crude oil were +60k bpd. to 6.4 million Bbld. vs. 5.8 the prior week while exports were 3.6 million bpd. vs. 3.8 the prior week. Exports of petroleum products were 6.8 million bpd. last week vs. 7.2 the prior week. Total US oil production was 13.6 million bld. vs. 13.4 last year at this time. The US oil rig count fell -4 last week to 418 while gas rigs were +2 at 120. Total US rigs are now 547 vs. 586 last year at this time.

AAA’s average US retail gasoline prices at the pump were most recently reported at $3.10/gal.,
-$0.052/gal. vs. last week, -0.093 /gal. from last month and -$0.112/gal. less than a year ago.

US container imports fell -8.4% last month as the Trump tariffs disrupt global trade with Chinese deliveries down -22.9%. Analysts believe a peak has already occurred as buyers “front-loaded” their holiday purchases ahead of the imposition of the tariffs. Wall Street is reacting negatively to the new threat on increased tariffs on China as retaliation for their new rules on critical minerals exports and microchip imports. On social media, Trump has said there is no reason for he and Xi Jinping to meet in two weeks as planned. All (3) major US stock indexes are lower week-on-week while the USD is higher which tends to suppress oil prices.