Further drop in crude oil prices: oil market rebalances
Weekly analysis of the oil market
Crude oil prices remain on a downward trend for the third consecutive week. The geopolitical premium that kept prices around $90/b has declined, although an extension of the conflict between Israel and Hamas to other parts of the Middle East remains possible, even inevitable for some countries like Iran. The price of crude oil currently fluctuates between $80 and $85/b, in line with its equilibrium price based on market fundamentals, estimated at $83/b (model linking the supply, demand and evolution of oil stocks. On the futures markets, hedge fund managers continued to disengage with a further 24,245 (-7.7%) decline in combined net positions (Brent and WTI). Oil prices, however, found some support at the end of last week as financial markets rallied.
Europe: Lower gasoline and diesel prices in the Rotterdam market
Petroleum product prices followed the decline in crude oil prices, with a 1.9% decrease for gasoline and 5.6% for diesel. In this context, the European refining margin (Brent FCC) increased by $0.5/b to $6.9/b, about double the average of the last 5 years.
The price correction on the oil market led to a clear reduction in the offset of the forward curves. The price spread between the first two Brent futures contracts narrowed from $1.5/bbl last month to just $20/bbl. Surprisingly, the price gap between the first two futures contracts on the WTI is even gone negative for one day last week. The premium on the price of oil for short-term delivery over longer maturities has also been significantly reduced. Currently, the difference between the contract of the first month and the contract with maturity in twelve months is $3/b, compared to $8 to $10/b the previous month.
This significant change in the shape of the forward curves suggests a more comfortable supply outlook for the oil market in the coming months. However, this situation could change if Saudi Arabia decides to extend its voluntary reduction of production beyond the end of year. The likelihood of such a decision has increased significantly in recent days due to the recent drop in prices. Saudi Arabia is expected to announce its decision at the next OPEC+ meeting in about two weeks.
On a weekly average, Brent crude oil prices on futures markets fell $4.7/bbl to $81.6/bbl, and WTI fell $4.1/bbl to $77.3/bbl. The consensus of economists surveyed by Bloomberg on November 10 remained stable, with a crude oil price for this quarter at $90/b and $90/b for the first quarter of 2024.
USA: the EIA forecasts a rebalancing of the oil market in 2024.
In its latest monthly report, the EIA forecasts oil production in 2024 up 1 MMb/d, down substantially from this year (+1.6 MMb/d). The US agency thus expects that OPEC+ production reductions will keep world production growth below that of world consumption (+1.4 MMb/d) contributing to a reduction in inventories and upward pressure on oil prices in early 2024. Although the Agency considers that the conflict between Israel and Hamas has not affected the physical supply of oil at this stage, uncertainties surrounding the conflict and other global oil supply conditions could put upward pressure on crude oil prices in the coming months. EIA projects that the price of Brent will increase from $90/b in the fourth quarter of 2023 to an average of $93/b in 2024.
In its analysis, the EIA notes that the gradual improvement in vehicle fuel efficiency and the increasing share of electric vehicles reduce the per capita demand for automotive gasoline in the United States. The agency cites researchers from the Argonne National Laboratory who estimated that the adoption of electric vehicles helped reduce fuel consumption in the United States by about 0.5% in 2021 compared to what it would have been otherwise. The impact of the adoption of electric vehicles on fuel consumption has probably increased since 2021; however, data lags on vehicle scrappage rates and changes in telework habits, among other factors, complicate the analysis of the impact of electric vehicles on recent per capita fuel consumption declines. EIA currently projects that overall gasoline consumption in the United States will decrease in 2024 to 8.83 MMb/d, from 8.88 MMb/d in 2023
EUROPE: Stocks rise in October. Crude oil consumption falls sharply.
US oil stock data was not available last week due to technical issues on the EIA website. In Europe, Euroilstock monthly figures show an increase in stocks of refined products in the EU-15 and Norway in October from 0.5 Mb to 585 Mb, mainly due to an increase in average distillate stocks. Stocks of petroleum products continued to rise despite a Crude oil consumption in European refineries fell 4.5% to 8.97 MMb/d, the lowest level since March 2022. This is partly due to maintenance work at several refineries over the past month. Average distillate stocks rose 0.3% to 393 MMBs in October. Although some market participants were concerned about a possible tightening of supply in Europe, in particular due to problems in refineries and the Russian diesel embargo, traders
Note that the distillate market remains well supplied, with aggregate demand for average distillates remaining weak in October. Gasoline inventories edged down 0.3% to 108 MMb, while demand remained strong during the month as arbitrage for exports to the US remained open. Oil inventories fell again in October, falling 1.2% to 56 Mb, the lowest level since September 2022. The use of lighter crude oils in European refineries appears to be putting pressure on oil supplies.