This week, U.S. crude oil fell slightly by about 3.48%, and Brent oil fell by about 2.4%, but oil prices recovered most of the intraday losses due to rising expectations for demand growth in Asia. The U.S. dollar index recorded its largest weekly decline (about 3.31%) since the week of March 27, 2020, which also strongly supported the rebound in oil prices.
As of press time, NYMEX crude oil futures fell 3.40% to $89.30 per barrel; ICE Brent crude oil futures fell 2.38% to $96.40 per barrel. The intraday lows in the two cities since late October were $84.70/barrel and $93.34/barrel, respectively.
U.S. CPI data was lower than expected, and the dollar index fell sharply to support oil prices
The October inflation data released by the U.S. Bureau of Labor Statistics (BLS) showed that the U.S. inflation rate was lower than expected in October. The U.S. CPI rose 0.4% month-on-month in October, below expectations for a 0.6% increase. October CPI rose 7.7% year-on-year, lower than expected and the previous value. “Headline inflation rose 7.7% year-on-year in October, the smallest annualised increase since January 2022,” the BLS said.
The core CPI, which excludes food and energy indices, rose 0.3% in October from September, compared with expectations for a 0.5% rise. Core inflation came in at 6.3% year-on-year, below analysts’ expectations of 6.5%.
The lower-than-expected inflation data has injected confidence into markets, including the oil market, that the Federal Reserve may have reason to abandon the sharp rate hikes of recent months, and that a potentially slower pace of rate hikes could revive economic growth and oil demand growth. . Therefore, the better-than-expected October CPI data provided strong support for oil prices.
supply side
1. U.S. producers warn of slower output growth despite rising U.S. crude inventories
Crude oil prices were lower after the U.S. Energy Information Administration (EIA) reported that crude inventories rose by 3.925 million barrels in the week ended Nov. 4. U.S. crude inventories fell by 3.115 million barrels in the previous week, according to EIA estimates.
In gasoline, EIA inventories fell by 899,000 barrels last week, with production averaging 9.8 million barrels per day. By contrast, inventories fell by 1.257 million barrels in the previous week, with production at 9.5 million barrels per day.
In distillates, EIA inventories fell by 521,000 barrels for the week ended Nov. 4, with production averaging 5.2 million barrels per day. That compares with a 427,000-barrel increase in inventories the previous week, which had also edged up by 200,000 barrels.
A day earlier, the American Petroleum Institute (API) announced that crude oil inventories rose by 5.618 million barrels in the week ended November 4, and it is estimated that inventories have increased by 31 million barrels since the beginning of the year.
Whether it is EIA or API, the crude oil inventory data published by both show that the crude oil inventory has increased in the last week, which means that the supply in the market has increased. However, it is important to note that fuel inventories, including gasoline and middle distillates, have fallen, indicating a lack of refining capacity in the United States.
U.S. oil companies have recently warned that output growth will slow as economic headwinds intensify. Inflation, labor shortages and supply chain issues have added to uncertainty in the oil industry, and U.S. oil companies are likely to remain cautious for the foreseeable future as the market faces a difficult path.
Although U.S. President Biden has repeatedly called on U.S. oil producers to expand oil production, it has been established that clean energy is the future development trend, coupled with the expected recession in the U.S. economy, oil companies have no willingness and lack of conditions to expand production scale. It is self-evident that as a politician, President Biden’s appeal has obvious political interests, and oil companies can understand that this is a pit, and whoever is unlucky. Although U.S. crude oil inventories seem to be detrimental to oil prices this week, this only reflects the supply situation in the U.S. market for just one week and does not affect the overall situation. The point is, from the attitude of US oil producers, it is really difficult to say whether the long-term domestic oil supply in the US will be sustainable.
2. OPEC+ production cuts and EU sanctions on Russian oil will cause continued supply constraints
While slowing and recession fears have weighed on oil prices for months, OPEC+ production cuts starting this month and the EU ban on seaborne imports of Russian crude from next month (and Russian oil products from February 2023) , may over-tighten the market.
OPEC+ has cut its overall crude oil production target by 2 million barrels per day since November, which has brought long-term tight supply expectations and has a pivotal impact. Shortly after OPEC+ decided to cut production, Morgan Stanley said in early October that oil prices would rise to $100 a barrel again at a faster pace than previously expected, and raised its forecast for the first quarter of 2023 from $95 raised to $100.
Warren Patterson, head of commodity strategy at ING, said the OPEC+ production cuts had changed the bank’s forecast for oil production in 2023, from a surplus before mid-2023, which was previously expected, to a full-year shortage.
In an analysis last week, Patterson said the relief in energy markets would not last long, adding that ING currently sees Russian crude supplies in the first quarter of 2023 as the EU imposes an embargo on Russian crude and products. would be reduced by just over 2 million barrels per day.
The Riyadh-based International Energy Forum (IEF) believes Brent could easily top $100 a barrel again if the European Union’s ban on Russian offshore crude oil imports comes into effect next month, with supply losses from Russia approaching 3 million barrels per day (bpd) . According to the IEF, the world‘s largest group of international energy ministers, the oil market could lose between 1 million and 3 million barrels per day of oil supplies from Russia when the sanctions take effect.
Russia’s TASS news agency quoted analysts at the Energy Development Center as saying that when the EU’s import ban on Russian crude oil comes into effect, Russian oil production may fall to 9 million barrels per day in December. “We expect December production to fall by 1.5 to 1.7 million bpd, or 14%, compared to the June-October average,” the TASS news agency said, citing a report by the Energy Development Center. , Considering that OPEC+ will reduce target production from November, the expected sharp drop in Russian oil production will lead to a sharp rise in international oil prices.
Despite the headwinds facing the global economy, the risk to oil prices in the coming weeks and months is more upside than downside due to a combination of two positive factors, OPEC+ production cuts and the EU’s ban on Russian offshore oil imports. Goldman Sachs currently forecasts Brent at $110 in 2023, but there are significant upside risks due to possible supply disruptions from Russia, Libya, Iraq and Iran.
demand side
The epidemic measures in Asia’s major oil-consuming countries have loosened, and oil demand growth is expected to heat up
This week, the decision-makers of major oil-consuming countries in Asia put forward new requirements for epidemic prevention and control measures, and made detailed relaxation optimization adjustments. These measures send a clear signal that policymakers have the ability to control the epidemic, and the full reopening of the economy is on the way. This has greatly eased tensions over the outbreak in Asia, thereby boosting confidence in a full economic recovery. Oil demand expectations have been fully boosted as market sentiment has improved significantly as new epidemic measures have given the market enough certainty.
Goldman Sachs economists believe the recent news reports just mark the beginning of a months-long preparation period for Asian countries to reopen. The bank’s current forecast of $110 a barrel for Brent in 2023 faces an upside risk of $6 a barrel if it reopens earlier.
Summary of the week
Warnings of slower output growth from U.S. oil producers offset the negative impact of rising crude inventories. On the supply side, the supply-side OPEC+ production cuts and the EU’s embargo on Russian oil have lingering concerns about supply tensions, which continue to benefit oil prices; on the demand side, the loosening of epidemic prevention and control measures in Asia’s major oil consuming countries has stimulated market sentiment, and oil demand growth is expected to heat up. , which gave oil prices a firm foothold. In addition, oil prices were also strongly supported by a weaker U.S. dollar. Oil prices fell slightly this week. If the epidemic situation in Asia is stable and does not recur, we will continue to be optimistic about oil prices in the short and medium term.