The significant oil price rally that began last week, boosting prices by nearly $10 per barrel, has started to reverse. As of Thursday at 11:40 a.m. ET, Brent crude futures for December delivery were trading at $76.63 per barrel, while West Texas Intermediate (WTI) crude stood at $73.24 per barrel. This marks a sharp decline from Monday’s two-month highs of $81.12 for Brent and $77.91 for WTI. The surge in prices was initially triggered by speculation that Israel could strike Iran’s oil facilities, following signals from Washington.
Potential Impact of Israeli Strikes on Iranian Oil Supply
Citi analysts estimate that a major Israeli attack on Iran’s oil export capacity could potentially remove 1.5 million barrels per day (bbl/day) from the market. A smaller-scale attack on downstream infrastructure could reduce output by 300,000 to 450,000 bbl/day. Iran’s oil production reached a six-year high of 3.7 million bbl/day in August, according to ANZ Bank.
Clearview Energy Partners has also weighed in on the potential consequences of a disruption in the region. They predict that if the Strait of Hormuz is blocked, oil prices could rise by as much as $28 per barrel. An attack on Iranian energy facilities might lead to a $13 per barrel increase, while economic sanctions imposed by the U.S. and its allies could push prices up by $7 per barrel.
Short Sellers Hold Their Ground
Despite the recent rally, short sellers in the oil market are not backing down. Analysts at Standard Chartered attribute the price surge to short sellers scrambling to cover their positions as the Middle East crisis escalated. However, the analysts warn that short sellers remain active and have not significantly retreated. Once the initial reaction to the crisis is accounted for, the market response to threats against Iranian energy infrastructure has been less dramatic than expected.
Standard Chartered highlights that Brent’s front-month settlement on October 7 was lower than on the same dates in 2021, 2022, and 2023. Prices have simply returned to their levels from late August, reflecting a persistently bearish sentiment in the market over the past three months. Many traders remain willing to short oil if market conditions and daily news flows favor such actions. Data on market positioning shows little change in the week ending October 1, with net selling of WTI crude futures exceeding net buying. The bank’s crude oil positioning index remains largely unchanged at -69.1. Neither the recent Chinese economic stimulus nor the increase in Middle Eastern violence has had a significant impact on short sellers.
Bearish EIA Report Drives Oil Price Decline
The ongoing selloff in oil prices was triggered by the release of the latest weekly report from the U.S. Energy Information Administration (EIA), which Standard Chartered has rated as highly bearish. According to their U.S. oil data bull-bear index, total commercial inventories fell by 0.91 million barrels to 1.267 billion barrels, with the deficit below the five-year average increasing to a 20-week high of 20.74 million barrels. However, the bull-bear index was negatively impacted by increases in crude oil, gasoline, and distillates inventories, both in absolute terms and compared to five-year averages.
Crude oil inventories rose by 3.89 million barrels to 416.93 million barrels, with the deficit below the five-year average shrinking by 3.46 million barrels to 18.44 million barrels. Standard Chartered noted a highly unusual trend in which every element of the week-on-week crude balance changes pointed toward higher inventories. This included higher domestic output, increased imports, lower exports, reduced refinery runs, slower Strategic Petroleum Reserve (SPR) fills, and a higher adjustment term.
Europe’s Natural Gas Prices Decline
In Europe, natural gas futures also experienced a decline, falling below €40 per megawatt-hour to €38.52 per megawatt-hour. This represents a retreat from the 10-month high of €41 per megawatt-hour reached earlier in the week. The drop in prices was primarily driven by increased wind power generation and a stable supply of Norwegian gas.
EU gas inventory growth has slowed significantly, with the past week’s increase falling to less than 30% of the five-year average. Data from Gas Infrastructure Europe (GIE) shows that Europe’s gas inventories stood at 111.05 billion cubic meters (bcm) as of October 6, with a week-on-week build of 391 million cubic meters (mcm). Three of the daily changes during the week were below 50 bcm, including a 42 mcm draw on October 2. The deficit compared to last year has grown to 1.5 bcm, while the surplus above the five-year average has shrunk to a 23-month low of 6.17 bcm. This slower pace of inventory buildup suggests that Europe’s gas storage levels might reach only 112 bcm this year, far below the previous forecast of 166 bcm based on August projections.
You Might Be Interested In
- How to Invest in Oil Commodities: A Comprehensive Guide
- What Hours Does Oil Trade?
- How to Invest in Crude Oil Etf in India?