Oil Prices Decline Amidst Risk Aversion at the Start of Q4; Attention Turns to OPEC

Every market, including the oil market, is influenced by a complex web of factors, and it doesn’t exist in isolation.

Concerns about resurging inflation and its potential impact on demand sent shockwaves through global markets as the fourth quarter began.

The dollar’s climb to a fresh 10-month peak further compounded the pressure on commodities priced in U.S. currency. This surge in the dollar came as several Federal Reserve officials indicated on Tuesday that another interest rate increase might occur in November or December to rein in inflation, which is currently running at 3.7%, above the central bank’s 2% annual target.

Regarding crude oil, both New York-traded West Texas Intermediate (WTI) and London’s Brent crude experienced a 2% decline, extending losses observed on Friday. These two key crude benchmarks had surged by almost 30% during the third quarter, raising concerns about potential economic disruptions in countries that do not produce oil.

Although September’s manufacturing data, as indicated by the Purchasing Managers Index, showed improvements in both the United States and Europe, economists attributed this to a reduction in raw material inventories. The main concern is the global economic outlook for the remainder of 2023 if energy prices continue to rise unchecked, placing significant strain on operational costs.

John Kilduff, a partner at the New York energy hedge fund Again Capital, emphasized the substantial harm that high oil prices can inflict on the economy. He also stated that such price levels are unsustainable for most of the world, which relies on oil consumption rather than production.

The West Texas Intermediate (WTI) crude oil contract for delivery in November concluded at $88.82 per barrel, falling below the critical $90 per barrel threshold. This decline amounted to a decrease of $1.97, or 2.2%, for the day, with the U.S. crude benchmark touching a three-week low of $88.47 earlier in the session.

The Brent crude oil contract for December delivery, which represents the most active trading, closed at $90.71 per barrel. This marked a decline of $1.49, or 1.6%. During the session, the global crude benchmark dipped to $90.36.

Tomorrow, OPEC+ is set to convene, bringing together 23 oil-producing nations. This alliance includes the 13-member Organization of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia and 10 non-OPEC producers, with Russia playing a key role. Those favoring higher oil prices are looking to OPEC+ to potentially boost the market, which has seen a steady climb in the past four months.

However, sources within OPEC+ have indicated privately to the media that the alliance is unlikely to make any adjustments to production targets for the months of November and December.

The Saudis and Russians made a commitment last month to reduce their regular production by at least 1.3 million barrels per day until the end of the year, with the aim of pushing crude oil prices back to $100 a barrel or higher. U.S. crude oil prices climbed from under $64 per barrel in May to over $95 per barrel in September, while the global benchmark Brent crude rose from below $72 to above $97 per barrel during the same period.

Meanwhile, OPEC+ might have incurred a different kind of „cost“ for taking such action.

Crude oil imports in Asia declined for the second straight month in September due to refinery maintenance reducing demand and the growing impact of rising prices, according to data from LSEG as reported by Reuters.

Asia, the world’s leading region for oil imports, received approximately 24.95 million barrels per day in September. This figure was slightly lower than the 25.22 million barrels per day recorded in August, as reported by LSEG.

Saudi Arabia and Russia are bracing for various challenges in the October-December period, which could make it challenging to replicate the market performance seen in the third quarter.

There is increasing pressure on Saudi Arabia and Russia to consider scaling back some of their output cuts to ensure sufficient oil supply for scheduled year-end deliveries, despite the expectations that OPEC+ may not make changes to its production targets.

There is a growing belief, particularly among the Saudis, that they must safeguard their market share in the face of high barrel prices, which leave them vulnerable to competition from their allies, including Russia.

India’s imports of Saudi oil dropped to below 500,000 barrels per day in September, marking the lowest level in almost a decade.

Varied data from China

Despite the return of Chinese manufacturing PMI to expansion territory in September for the first time since March, concerns over Chinese demand for oil persist, as noted by the Saudis.

Official data released on Saturday indicated that China’s factory activity expanded for the first time in six months in September. This is in line with several indicators pointing to a stabilization of the world’s second-largest economy.

A private-sector survey conducted on Sunday painted a somewhat less encouraging picture, indicating that China’s factory activity expanded at a slower pace in September compared to the official data, suggesting some mixed signals in the country’s economic recovery.

China’s economic rebound is facing setbacks due to a persistent decline in the property market, decreasing export figures, and a notable rise in youth unemployment. These challenges have sparked concerns about a potential decline in fuel demand.

Saudi Arabia may need to increase oil production, not reduce it

Hence, it is conceivable that in October, the Saudis may have to increase their production—instead of maintaining it at September’s levels, and certainly not reducing it—in order to satisfy the demands of crucial customers like China and India.

Indeed, it appears that crude oil shipments from Saudi ports likely experienced an increase of approximately 300,000 to 400,000 barrels per day last month compared to August. This occurred despite their self-proclaimed „lollipop cut“ of one million barrels per day, as reported by OilPrice.com, which compiled market intelligence from diverse sources.

Furthermore, it has been suggested that this trend may persist, as indicated by the same sources.

The Saudis have demonstrated considerable restraint in adjusting the Official Selling Price (OSP) of their crude oil, despite the significant surge in Brent prices, as indicated in the market roundup. Saudi Arabia’s medium sour crude grades saw a modest increase of $0.10 per barrel each, resulting in Arab Light commanding a premium of $3.60 per barrel over Oman/Dubai. The sole Saudi crude grade that witnessed a noteworthy uptick in October was Arab Super Light, an exceedingly rare condensate-like grade with just 1-2 cargoes per month, which saw a price increase of $0.50 per barrel.

“In an environment like this, Saudi Arabia’s national oil company Saudi Aramco was expected to hike Asian prices by a solid margin,” said the OilPrice roundup. “Surprisingly, the anticipated OSP increase did not happen.”

“Overall, the lack of pricing ambition reflected wider worries about the health of Chinese demand into the remaining months of 2023, as well as significantly lower Indian nominations lately.” 

To Moscow’s advantage, India has initiated the purchase of Russian Urals crude at approximately $80 per barrel. This price is notably higher than the $60 price limit set by the G7 but remains lower than the outright price of Brent crude.

Russia, which has pledged to participate in the Saudi production reduction plan with its announced 300,000-barrel per day cut, is also facing pressure to fulfill its commitments to customers by maintaining timely deliveries.

Russia expected to reverse fuel export ban

Moscow has recently relaxed its independent ban on fuel exports, a measure that was initially introduced to stabilize the domestic market. Analysts anticipate that these restrictions are unlikely to be in place for an extended period, as they could negatively affect refinery operations and strain relationships with customers.

According to JPMorgan, Turkey, Brazil, Morocco, Tunisia, and Saudi Arabia have been prominent destinations for Russian diesel exports this year.

According to JPMorgan, “(A) protracted export ban would negatively impact the relationship with the new customers that Russian oil companies have so painstakingly built over the last year and a half”.

Nevertheless, the Kremlin has stated that Russia has not engaged in discussions with OPEC+ regarding the possibility of increasing crude oil supplies to offset Moscow’s ban on fuel exports.

Such communication could potentially occur directly when Russia and Saudi Arabia engage in talks during Wednesday’s OPEC+ meeting.

After having created an impression in the trading community that their production cuts could continue indefinitely, even in contrast to market conditions, it is crucial for both sides not to publicly acknowledge anything to the contrary. Instead, they may strive to maintain the narrative they have established.

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