Oil slid on reports of the withdrawal of OPEC voluntary cut

·         Despite lingering geopolitical tensions, oil slumped as Saudi Arabia may withdraw voluntary cut along  with other OPEC+ producers after Dec’24

·         Gold and Wall Street wobbled amid hopes & hypes of an imminent Gaza/Lebanon war ceasefire and upbeat revision of Q2CY24 US real GDP to +3.0%

Oil plunged over 7% in September (till today) and made a panic low around $65.28 early European session Thursday on hopes & hopes of an imminent Gaza/Lebanon war ceasefire, at least temporary. Early Thursday, US President Biden and his French counterpart Macron issued a joint statement, in the backdrop of the current UN Session, calling for an immediate ceasefire for the intensifying Lebanon war (Hezbollah-Israel):

“It is time for a settlement on the Israel-Lebanon border that ensures safety and security to enable civilians to return to their homes. The exchange of fire since October 7th, and in particular over the past two weeks, threatens a much broader conflict, and harm to civilians. We therefore have worked together in recent days on a joint call for a temporary ceasefire to give diplomacy a chance to succeed and avoid further escalations across the border. The statement we have negotiated is now endorsed by the United States, Australia, Canada, the European Union, France, Germany, Italy, Japan, Saudi Arabia, the United Arab Emirates, the United Kingdom, and Qatar. We call for broad endorsement and the immediate support of the Governments of Israel and Lebanon”.

On early Thursday, Gold, Oil came under some stress on hopes & hypes of an imminent Lebanon War ceasefire but soon got some boost after it became almost clear that due to growing domestic political opposition by allied parties of Israeli PM Netanyahu, most of whom are opposing any ceasefire deal with Hezbollah/Lebanon at this moment as it may provide a window for Hezbollah to reorganize itself after heavy attack by the IDF.

Meanwhile, IDF/Israel may be preparing for a ground offensive in Lebanon, while Turkey has warned/blamed Israel for a wider regional war and all major G20 countries are urging their citizens to leave Lebanon immediately.

On the other side, there it also seems that Lebanon/Hezbollah has no confidence in a ceasefire agreement as both have been clear that they do not see the US/West as an honest broker, given that weapons are still reaching Israel and being used in Gaza and Lebanon. On Hezbollah’s part, there has always been a ceasefire proposal on the table. If there is a permanent ceasefire in Gaza, they will cease the hostilities. This has always been the deal since October 8 last year. Ceasefire talk has been going on for months in Gaza, but every time they get close, the Israeli PM ups the ante and the talks fall apart. The Lebanese government has yet to react officially to the talks of a possible ceasefire and perhaps they will do that later through their UN ambassador in New York.

Meanwhile, Foreign Minister of Israel Katz said there will be no ceasefire in the north, after PM Netanyahu denied claims that a truce is in the cards: “We will continue to fight the Hezbollah terror group with full force until victory and the return of residents of the north to their homes safely”.

On 12/09/24, the IEA said in its August MOR (Monthly Oil Report):

Highlights

Global oil demand growth continues to decelerate, with reported 1H24 gains of 800 kb/d y-o-y the lowest since 2020. The chief driver of this downturn is a rapidly slowing China, where consumption contracted y-o-y for a fourth straight month in July, by 280 kb/d. Average annual gains of 900 kb/d in 2024, compared to 2.1 mb/d last year, will take demand to almost 103 mb/d. An increase of 950 kb/d in 2025 will be equally subdued.

World supply rose by 80 kb/d to 103.5 mb/d in August, with outages caused by a political dispute in Libya combined with maintenance in Norway and Kazakhstan offset by higher flows from Guyana, Brazil, and elsewhere. Annual gains strengthen from 660 kb/d this year to 2.1 mb/d in 2025. Non-OPEC+ increases by 1.5 mb/d this year and next, while OPEC+ may fall by 810 kb/d in 2024 but rise by 540 kb/d next year if voluntary cuts stay in place.

Global refinery throughputs are forecast to increase by 440 kb/d to 83 mb/d in 2024; and by 630 kb/d to 83.7 mb/d next year. Much weaker-than-expected Chinese runs in July and a further deterioration in margins continue to weigh on the forecast; Cracking margins briefly turned negative in Europe and Singapore. US Gulf Coast cracking margins are more resilient, but they have nevertheless fallen by two-thirds versus year-ago levels.

Global observed oil stocks declined by 47.1 mb in July; the drawdown was concentrated in crude oil, NGLs, and feedstocks (-75.5 mb), while oil products built to their highest level since January 2021. OECD industry stocks fell counter-seasonally by 12.3 mb in July to stand 78.5 mb below the five-year average. Preliminary data show continued stock declines in August.

Oil prices spiraled lower in August and early September, with ICE Brent futures plunging by about $10/bbl as floundering Chinese demand and economic headwinds heightened oversupply fears. Investor selling added to the bearish sentiment, with net speculative exchange holdings slumping to multi-year lows. At the time of writing, Brent was trading at around $70/bbl - the lowest level since late-2021 and down $20/bbl from April's 2024 high.

When the music stops

The rapid decline in global oil demand growth in recent months, led by China, has fueled a sharp sell-off in oil markets. Brent crude oil futures have plunged from a high of more than $82/bbl in early August to a near three-year low at just below $70/bbl on 11 September, despite hefty supply losses in Libya and continued crude oil inventory draws.

Global oil demand growth is slowing sharply from its post-pandemic rates, as already forecast in the OMR for some time. Reported monthly data covering 80% of global oil demand during the first half of 2024 confirm the steep decline in the rate of growth in oil consumption, which we have been projecting since our first forecast for 2024 was published in June 2023. Demand rose by 800 kb/d year-on-year over the first half of the year, dramatically lower than the growth of 2.3 mb/d recorded in 2023, but close to our initial forecast. For the year as a whole, global oil demand is on course to increase by 900 kb/d in 2024 and 950 kb/d next year.

The recent slowdown in China has seen its oil consumption declining y-o-y for a fourth consecutive month in July, by 280 kb/d. This stands in marked contrast to the 1 mb/d average pace of growth over the preceding 12 months, or the post-Covid surge of 1.5 mb/d in 2023. The country’s oil demand is now set to expand by only 180 kb/d in 2024, as the broad-based economic slowdown and an accelerating substitution away from oil in favor of alternative fuels weigh on consumption. Surging EV sales are reducing road fuel demand while the development of a vast national high-speed rail network is restricting growth in domestic air travel. The implications of the fundamental shift in the Chinese economic outlook and rapid changes to its vehicle fleet and transport modes are discussed in detail in our recent reports Oil 2024 and World Energy Outlook 2023.

Outside of China, oil demand growth is tepid at best. Latest data for the United States show a sharp decline in gasoline deliveries in June, following unexpected strength in May. As such, gasoline use in the world’s largest oil consumer declined y-o-y in five out of the first six months of this year. Structural headwinds and anemic economic growth mean that deliveries continue to contract in a number of advanced economies.

This could leave advanced economies’ oil use this year nearly 2 mb/d below its pre-pandemic level. With the steam seemingly running out of Chinese oil demand growth, and only modest increases or declines in most other countries, current trends reinforce our expectation that global demand will plateau by the end of this decade.

In an apparent effort to halt the precipitous slide in oil prices, in early September Saudi Arabia and its OPEC+ allies announced that they would postpone by two months the start of their planned unwinding of extra voluntary production cuts. The delay gives the alliance some time to further evaluate demand prospects for next year, as well as the impact of Libyan outages and its plan to phase out additional curbs of 2.2 mb/d by the end of next year. But with non-OPEC+ supply rising faster than overall demand – barring a prolonged stand-off in Libya – OPEC+ may be staring at a substantial surplus, even if its extra curbs were to remain in place. In the context of a rapidly evolving market, reliable energy data and unbiased market analysis will become more important than ever.

Overall oil is under stress as:

·         Subdued demand from China on lingering economic slowdown, increasing usage of EV, and HSR (High speed railway-replacing air travel)

·         Increasing production from N-OPEC+; more than incremental demand growths and production outage in Libya

·         OPEC+ may not be a in position to announce to taper voluntary cuts around 2.2 mbpd as underlying demand is tepid not only in China but also in the EU amid a stagflation-like scenario

The market is again concerned about negative oil rebalance as supply is growing more than demand growth rate. Further, on Thursday, there was a report that although OPEC+ is currently focusing on addressing overproduction by some members, OPEC+ is likely to go ahead with the planned December oil output increase as the impact of the hike is small given the expected compensation cuts by some members.

A month ago, there was also another report that OPEC+ was set to proceed with a production hike in October followed by another conflicting report that any October production cuts were likely to be delayed. Now another report indicated Saudi Arabia is ready to abandon its unofficial price target of $100 for crude as it prepares to increase output, in an indication that the world’s 2nd largest oil producer may be losing export market share to the US but is also committed to bringing back that production as planned in December, even if it leads to a prolonged period of lower prices. On the other side, Russia is not very happy with the overall OPEC stance.

Saudi Arabia may be now frustrated as several members of the OPEC+ cartel, including Iraq and Kazakhstan, have been partially ignoring the cuts by pumping more than their respective quotas despite intense efforts by the OPEC Secretary to correct the path.

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.

Market impact:

Overall, Oil is under stress despite lingering geo-political tensions (Gaza/Lebanon and Russia-Ukraine war) as demand is not growing as expected because of the increasing adoption of EVs, HSR and also increasing cost of maintaining a personal car in various countries like India, where the middle class is struggling under the higher cost of living. Also, the floating balloon by Saudi Arabia/OPEC to increase production is affecting the sentiment along with increasing production by N-OPEC+.

But despite all the OPEC+ jawboning, almost all of the OPEC+ producers except Saudi Arabia are producing maximum to their spare capacity. Now Saudi Arabia may be also frustrated and threatening other OPEC+ producers to fall in line or face another wave of lower prices. Although, Saudi Arabia is a rich economy, has a fiscal surplus, and has an alternate mode of financing, in the long run, it has no alternative other than oil to run the economy.

Weekly-Technical trading levels: oil

Technically Oil (67.00) now has to sustain over 65.00 for any rebound to 72.00/73.00-74.00/76.50 and further 78.00-79.00/80.50-82.00/85.00-88.00-90.00/91.00-95.00; otherwise sustaining below 64.00, oil may further fall to 62.00/60.00-57.00/55.00 in the coming days.