Oil, Gold slumped on hopes of Gaza war ceasefire

·         Stimulus addicted Wall Street almost flat ahead of Fed/Powell on hopes & hypes of rate cuts from Sep’24 and tax cuts by Trump early 2025

Oil stumbled almost -6% in July (till date) on hopes & hypes of an imminent Gaza war ceasefire and Trump 2.0 optimism. Trump may deregulate various curbs on oil to encourage more US production, negative for oil. At the same time, the intention of the Biden admin to refill SPR and Russia/OPEC+ stance of continuing production cuts in 2025 (including higher cuts for previous compliance factors) buoyed oil, which stumbled from around 84.70 to almost 76.00. Trump, if again elected may also impose some sanctions on Iran, which is positive for the oil. Moreover, the latest data indicates tepid demand from Asia, including China and India (after the election). Also, Russia is reducing its oil exports to China and India due to higher refining activities back home.

The market may be now expecting an imminent Gaza war ceasefire before the US Presidential Election in Nov’24, although Hamas is still questioning about intention of Israeli PM Netanyahu for such a permanent ceasefire. On Wednesday (24th July), in his 1st speech since candidature withdrawal, Biden vows to work to end the Gaza war and get hostages home before his term ends by Dec’24. Biden attributed his decision to quit the Presidential race to the need to beat Trump: ‘The defense of democracy is more important than any title’; he repeats endorsement of ‘incredible partner’ Harris. Biden said ending Israel’s war with Hamas in the Gaza Strip would be one of his highest priorities as he ends his Presidency.

On Thursday, Wall Street Futures initially surged, while Gold, Silver, and Oil slumped on hopes & hypes of an imminent Gaza war ceasefire, but reversed to some extent in the last hour of trading as Israel complained deal chances dented after US VP Harris vows to speak out on Gaza’s woes. Again on Friday and early Monday both Oil and Gold got some boost after a report that Israel may attack Hezbollah deep inside Lebanon after the heinous alleged rocket attack (with Iranian warheads/explosives) at Majdal Shams soccer ground at Golan Heights, which killed several kids and others. Although, officially Hezbollah has denied such attack, Israeli PM Netanyahu warned that Hezbollah will pay a "heavy price" for its attack.

But now it seems that although Israel wants to retaliate against Hezbollah over its alleged rocket attack but does not want to push the entire Middle East into a regional war. According to reports, Israel does not exclude an option of engaging in armed clashes with Hezbollah but does not see a regional war as something "in our interest." Meanwhile another report claims that Israel is also studying/considering another alternative ceasefire proposal with Hamas & Co (Gaza war). Also, the US Secretary of State Blinken has urged both Israel and Hezbollah to avoid further escalation, while stressing Israel’s security against threats from Iranian backed terrorists organizations such as Hamas & Hezbollah.

On Friday, Gold, Oil also recovered amid lingering uncertainty of an imminent Gaza war ceasefire ahead of the US Presidential election due to domestic political compulsion. Both Democrats and Republicans are shying away from endorsing the Israeli stance on the Gaza war blindly as it would cause a loss of votes from not only the Muslim community but also non-Muslim immigrants and even Native Americans. Also, American Muslims or even most non-Muslim voters are not happy about the killing of innocent civilians including children by Israel in the same Gaza war, which is now looking more like genocide.

On the other side, due to his domestic political compulsion, Israel, especially PM Netanyahu, is not ready for any reasonable/practical compromise (considering the reality of the situation), which may further harm his political career back home amid falling popularity/approval rating for his overall handling of the situation since 7th Oct’23.

Text of IEA’s Monthly Oil Report (MOR): June

Highlights

World oil demand continues to decelerate, with 2Q24 growth easing to 710 kb/d year-on-year – the slowest quarterly increase since 4Q22. Chinese consumption contracted, as the country's post-pandemic rebound has run its course. Global gains are forecast to average just below 1 mb/d in 2024 and 2025, as subpar economic growth, greater efficiencies and vehicle electrification act as headwinds.

Global supply rose 150 kb/d to 102.9 mb/d in June as field maintenance eased and biofuels rose, offsetting a significant drop in Saudi flows. Solid monthly gains pushed 2Q24 output 910 kb/d higher q-o-q. Growth of 770 kb/d is seen for 3Q24 with non-OPEC+ providing 600 kb/d of the gains. Annual increases of 770 kb/d are forecast in 2024 with gains of 1.8 mb/d next year.

Global refinery throughputs are forecast to rise by 950 kb/d to 83.4 mb/d in 2024, and by 630 kb/d to 84 mb/d next year. Weak demand and poor margins pressured Chinese and European crude processing in May. Margins declined in June in the Atlantic Basin and are close to multi-year lows. In Asia, they rebounded modestly in June, as run cuts eased regional crude market tensions.

Crude oil prices recovered from six-month lows in June, with Brent futures rising by $5/bbl to $86/bbl. Falling crude stocks, investor short covering and renewed Middle East geopolitical tensions contributed to the price strength, with fund positions recovering from historically low levels.

Global observed oil inventories rose for a fourth consecutive month in May, by 23.9 mb. Offshore inventories drew by 17.3 mb while on land stocks built by 41.3 mb to a 30-month high. OECD industry stocks rose by 27.8 mb to 2 845 mb but remained 69 mb below their five-year average. Preliminary data show global oil stocks falling by 18.1 mb in June, dominated by crude while products built.

Summer heat

Benchmark crude oil prices bounced back from six-month lows over the course of June after OPEC+ officials stated that unwinding voluntary production cuts would depend on market conditions – and as geopolitical risks remained high. ICE Brent futures rose by $5/bbl to $86/bbl by end-month.

Oil prices increased in June despite mounting concerns over the health of the Chinese economy and slowing oil demand growth. Global observed inventories were up in May for the fourth month in a row, reaching their highest level since August 2021. Offshore inventories moved ashore at a brisk pace, with oil on water down sharply, while on land stocks rose to a 30-month high ahead of the seasonal uptick in refinery activity. OECD industry stocks built for a second consecutive month after having declined for the previous six months. Preliminary data suggest global oil stocks fell 18.1 mb in June, led by a 1 mb/d draw in crude.

World oil demand growth slowed to only 710 kb/d in 2Q24, its lowest quarterly increase in over a year. Oil consumption in China, long the engine of global oil demand growth, contracted in both April and May, and is now assessed marginally below year earlier levels in 2Q24. That stands in stark contrast to annual gains of 1.5 mb/d in 2023 and 740 kb/d in 1Q24. Demand for industrial fuels and petrochemical feedstocks were particularly weak.

By contrast, second-quarter delivery data of gasoil and naphtha for OECD economies came in higher than expected, potentially signaling a budding recovery in Europe’s ailing manufacturing sector. While the bounce temporarily pushed quarterly OECD demand growth back into positive territory, non-OECD countries will account for all this year’s global gains. World oil demand growth expectations for the 2024 and 2025 are largely unchanged at 970 kb/d and 980 kb/d, respectively.

At the same time, global oil supply trended higher, with 2Q24 production up 910 kb/d from 1Q24, led by the United States. Output is forecast to rise by another 770 kb/d in 3Q24 with non-OPEC+ providing 600 kb/d of the gains. For 2024 as a whole, global oil supply growth is forecast to average 770 kb/d, which will boost oil supply to a record 103 mb/d. Non-OPEC+ output is expected to rise by 1.5 mb/d, while OPEC+ production will fall by 740 kb/d year-on-year if existing voluntary cuts are maintained. Global supply growth in 2025 is projected at a much stronger 1.8 mb/d, with non-OPEC+, mainly in the United States, Canada, Guyana and Brazil, leading gains for a third consecutive year, adding 1.5 mb/d.

In early June, OPEC+ laid out a roadmap for unwinding extra voluntary supply reductions of up to 2.2 mb/d from 4Q24 through 3Q25. Given the bloc’s assurances that the production increase can be paused or reversed subject to market conditions, we will adjust our OPEC+ supply numbers when such a decision is confirmed. The OPEC+ Joint Ministerial Monitoring Committee is meanwhile due to meet on 1 August to review global oil market conditions and production levels.

Our current non-OPEC+ supply and global demand forecasts show the call on OPEC+ crude at 42.2 mb/d in 3Q24 and 41.8 mb/d in 4Q24 – roughly 800 kb/d and 400 kb/d above its June output, respectively. For next year, the call on OPEC+ crude tumbles to 41.1 mb/d as demand growth continues to slow and non-OPEC+ output continues to expand. After the hot summer, cooler trends are set to prevail.

Overall, the mix of EIA and OPEC production/demand data shows signs of tightening after Q1CY24 even as OPEC+ production cuts are being neutralized by higher productions from the U.S., Canada, Brazil, Chile, Guyana, Iran, Venezuela, and Mexico.

Overall, if we take an average of OPEC+IEA+EIA data, there was some glut around +0.26 mbpd (more supplies than demand) in 2023, whereas there may be some rebalancing (lower supply than demand) of -0.21 mbpd projected in 2024.

Conclusion:

Overall, global production/supply is now showing some signs of rebalancing/tightness. OPEC+ production cut narrative is now sounding more like central bank jawboning rather than real action/cut as apart from Saudi Arabia, none of the OPEC+ producers have meaningful real effective spare capacity to influence the global supply. Also, Saudi Arabia has some limits as oil revenue is the main source of national income. The same is almost true for other big OPEC+ producers. Moreover, OPEC+ is steadily losing market share as N-OPEC+ led by the US is increasing their production levels to nullify the OPEC+ cartel in this war of sheikhs and shale.

Market impact:

Oil slumped to almost $75 Monday, a seven-week low on fading concern of an all-out war in the Middle East involving Israel, Hezbollah, Hamas and Iran and even Turkey. Also Israel may be working seriously for an alternative ceasefire deal. On Monday, Israeli PM Netanyahu underlined that Israel did not make changes to the proposed ceasefire agreement with Hamas, stressing that the militant group's leadership is "preventing" the deal from being finalized. Moreover, latest economic data indicates lower demand from China.

Weekly-Technical trading levels: oil

Technically Oil (78.30) now has to sustain over 75.00 for any recovery to 78.50/80.50-82.00/85.00-88.00-90.00/91.00-95.00; otherwise sustaining below 74.50, oil may further fall to 73.00 and 72.00-70.00 in the coming days.