Recent analysis by BMO Capital Markets highlights the rapid shifts in U.S. market sentiment, which has recently oscillated between fears of recession and expectations of a soft landing. These swings are triggered by major economic data releases. In an investor note, BMO’s investment strategy team noted, “The pendulum has clearly swung towards optimism, with the S&P 500 sharply recovering from its recent sell-off and nearing record highs once again.”
Oil Markets Reflect Similar Sentiment
The trends observed by BMO in the stock market are mirrored in the oil markets. Oil prices retreated last week, pulling back from gains seen in prior weeks. This was largely due to easing geopolitical fears and ongoing concerns about demand. Last Monday, U.S. Secretary of State Antony Blinken announced that Israeli Prime Minister Benjamin Netanyahu had accepted a cease-fire proposal to halt the conflict in Gaza. Consequently, Brent crude saw four consecutive trading sessions of lower highs, lower lows, and lower settlements. Analysts at Standard Chartered noted that algorithmic traders, who follow market trends, have been particularly influential during this period, attributing this dominance to a seasonal lull among other traders.
Oil Prices Rebound Amid New Geopolitical Tensions
Despite the earlier decline, oil prices rebounded on Friday. Reports from sources close to the White House indicated that a cease-fire deal in Gaza was unlikely, as Hamas was not expected to accept Israel’s terms. These terms include the occupation of the Philadelphi corridor, which Israel claims is crucial for Hamas. The uncertainty caused oil prices to jump again on Monday morning after Libya’s government in Benghazi announced the shutdown of its oilfields, halting all production and exports.
Decline in Oil Trading Activity and Concerns Over Demand
According to Standard Chartered, open interest in Brent and WTI oil contracts dropped to a three-month low, with a reduction of 256 million barrels over the past four weeks. Analysts suggest this decline may stem from uncertainty on how to trade oil amid changing interest rates or fatigue among fundamental traders. Big rallies in oil prices this year have often been followed by prolonged pullbacks whenever bearish news emerges, contributing to poor sentiment in the market. This sentiment persists despite robust demand data.
Global Oil Demand Hits Record Highs, but Growth Slows
Data from the Joint Oil Data Initiative (JODI), released on August 19, shows that global oil demand reached an all-time high of 103.01 million barrels per day (mb/d) in June. Revisions by JODI indicate that May demand was 102.68 mb/d, the second-highest monthly average on record. The average demand growth for the second quarter was 1.521 mb/d year-on-year, closely aligning with Standard Chartered’s full-year forecast for 2024 of 1.514 mb/d. However, global crude supply growth remains subdued, with June’s supply increasing by only 160,000 barrels per day to 102.097 mb/d, significantly lower than the all-time high of 103.162 mb/d in December 2023.
Limited Supply Growth and U.S. Production Trends
The limited growth in global oil supply can be attributed to weak non-OPEC production, particularly in the U.S. This year, U.S. oil production is expected to grow by just 2.3%, as shale producers focus on maintaining production discipline and returning capital to shareholders. U.S. crude exports have averaged 4.2 million barrels per day in 2024, a modest 3.5% year-on-year increase, compared to the robust 13.5% growth seen in 2023. This year’s growth rate is the slowest since the U.S. lifted its 40-year federal ban on crude exports in 2015.
EIA Data Reflects Continued Decline in U.S. Crude Inventories
The latest weekly report from the U.S. Energy Information Administration (EIA) provides additional bullish indicators for oil. U.S. crude oil inventories resumed their decline, dropping by 4.65 million barrels to a six-month low of 426.03 million barrels. Over the past eight weeks, inventories have decreased by 34.7 million barrels, averaging a drawdown of 620,000 barrels per day. Distillate inventories also fell by 3.31 million barrels to 122.81 million barrels.
Revisions to Demand Data
Standard Chartered notes that while implied distillate demand in August appeared weak, EIA’s monthly data often undergoes significant upward revisions. The analysts point out that U.S. gasoline demand has been revised upward in 20 of the past 24 months, with an average increase of 146,000 barrels per day, representing 1.6% of total demand. This trend was confirmed when the EIA revised May’s gasoline demand upwards by 344,000 barrels per day to 9.396 million barrels per day, reflecting a 3.5% year-on-year increase. Jet fuel demand rose by 5.9% year-on-year, while total oil demand was revised higher by 811,000 barrels per day to 20.8 million barrels per day, a 2.3% increase. Distillate demand remained weak, but the decline was less severe than initially predicted, falling by 3.6% year-on-year compared to the EIA’s forecasted 7.1% drop.