Oil Market Battling Between These 2 Things, Analyst Highlights

Oil Market Battling Between These 2 Things, Analyst Highlights
In a report sent to Rigzone today, Bjarne Schieldrop, the Chief Commodities Analyst at SEB, highlighted that the oil market is 'battling' between two things.
Image by Zeferli via iStock

In a report sent to Rigzone today, Bjarne Schieldrop, the Chief Commodities Analyst at Skandinaviska Enskilda Banken AB (SEB), highlighted that the oil market is “battling between spike-risk versus 2025 surplus”.

“Brent crude fell 7.6 percent last week following a rally to $81.16 per barrel the week before when it felt like a retaliatory attack by Israel on Iran was imminent with all targets possible,” Schieldrop said in the report.

“Israel has promised that ‘Iran will pay’ for its attack on Israel on 1 October when it fired 200 ballistic missiles at Israel. But days passed by and no retaliation happened. Fears that Israel will go after Iranian oil installations and nuclear facilities also seems to have faded,” he added.

“Biden has urged Israel to not hit such targets. Israel has said that it will make its own choices so it is still an open risk that Israel could indeed hit Iranian oil installations,” he continued.

In the report, Schieldrop revealed that, to SEB, “it seems like close to certain that Israel will indeed retaliate at some point”. The analyst warned in the report that this would likely be “hard and forceful and not a muted retaliation like in April”.

Schieldrop pointed out in the report, however, that, “as long as nothing happens on a day to day basis, the oil price falls back with market focus circling back to concerns over a surplus of oil in 2025 where OPEC needs to cut another 0.9 million barrels per day to keep it in balance, according to the latest report from the International Energy Agency”.

“OPEC+ planning to add barrels to the market from December onward makes that look even worse of course,” he added.

Crude Has Been Running Tight

In the report, Schieldrop noted that, over the past three years, the oil market has been running tight.

“Tight on products and tight on crude. The long-dated Brent crude five-year contract, or the 60-month contract, has been very stable at close to $70 per barrel,” he said.

“The front-end Brent crude contract however has traded at a premium of $28 per barrel, $15 per barrel and $12 per barrel for 2022, 2023, and 2024 respectively versus the 60-month contract,” he added.

“If the oil market next year flips to a surplus with rising inventories then the market should naturally flip to a contango-market,” he continued.

The implication of that is that the front-end Brent contract will trade at a discount to the longer dated Brent price, Schieldrop stated in the report.

“The Brent 1 month price would then typically be $70 per barrel (long-dated 60-month price) minus some discount of maybe $5-10 per barrel. Implying a Brent 1 month price of $60-65 per barrel,” he said.

“This is what the oil bears are eyeing for 2025 and why we have seen such overly bearish positioning lately,” he continued.

Schieldrop stated in the report that, counter to such a development would be possible damage to Iranian oil supplies due to the forthcoming Israeli retaliation.

“Or in the following re-re-re-re-retaliations after that,” he warned.

“Or that Donald Trump is elected president and more strictly enforces sanctions on Iranian oil exports thus making room for more exports from the rest of OPEC+,” he added.

Gains

In a market analysis sent to Rigzone around midday today, Samer Hasn, a Senior Market Analyst at XS.com, highlighted that crude oil was up nearly one percent “across both major benchmarks, following a five-day losing streak”.

“Oil’s gains come after the People’s Bank of China cut interest rates more than expected as part of a series of economic stimulus measures that should support demand prospects for crude,” Hasn said in the analysis.

“This comes amid growing signs of further escalation in the Middle East and the lack of a resolution in the horizon, which could keep the door open for a return of the geopolitical risk premium to crude prices,” he added.

“The PBOC’s cut its Loan Prime Rate for one and five by 25 basis points to 3.1 percent and 3.6 percent, respectively. The anticipated move follows a series of previous measures aimed at supporting borrowers, particularly in the struggling housing market,” he continued.

Despite the market’s welcome of the move, it has been met with skepticism, along with other previous monetary measures, about the effectiveness in supporting the economy, Hasn stated in the analysis.

“What the central bank is doing alone will not be enough, as demand for credit is still weak in the first place, according to the Wall Street Journal, citing Capital Economics. Significantly restoring economic growth requires large fiscal support, not just monetary support,” Hasn highlighted.

“As such, I believe that oil’s gains, supported by economic factors from China, may be fragile and subject to rapid reversal,” he warned.

“This move also comes after the slowdown in GDP growth during the last quarter, as well as the slowdown in consumer price inflation and the contraction of producer prices faster than expected, in addition to the continued contraction in house prices, indicating continued weak demand,” he continued.

Looking at the Middle East in the analysis, Hasn said “the prospect of regional war looms ever larger, with no signs of de-escalation from Israel, leaving the door wide open for further conflict”.

“Even after talk of hope for a truce following the killing of Hamas leader Yahya Sinwar, there are no indications of imminent ceasefire talks, and the escalation has actually worsened over the weekend, according to the New York Times,” he added.

Crude Stabilizes After Sharp Declines

In a separate market analysis sent to Rigzone earlier today, Joseph Dahrieh, a Managing Principal at Tickmill, said “crude oil futures have stabilized to a certain extent after last week’s sharp declines, as concerns over weakening demand in China weighed on market sentiment”.

“China’s economic slowdown, now at its weakest growth rate since early 2023, continues to dampen expectations for a quick recovery in oil demand, despite ongoing Beijing… stimulus efforts,” he added.

“This has kept prices under pressure as investors monitor whether China can boost its demand,” he continued.

At the same time, changing geopolitical conditions continue to affect the market, Dahrieh stated in the analysis.

“Despite U.S. President Biden hinting at a potential de-escalation, briefly relieving pressure on prices, tensions remain elevated, keeping geopolitical risks in focus and raising the chance of renewed market volatility,” he warned.

“On the supply side, reduced U.S. oil and gas rig activity could provide support for prices if the trend continues,” he added.

“Meanwhile, Saudi Aramco’s CEO has expressed optimism about China’s oil demand, which is driven by government stimulus and increased needs for jet fuel and petrochemicals. Stronger demand could boost prices,” Dahrieh went on to state.

To contact the author, email andreas.exarheas@rigzone.com


What do you think? We’d love to hear from you, join the conversation on the Rigzone Energy Network.

The Rigzone Energy Network is a new social experience created for you and all energy professionals to Speak Up about our industry, share knowledge, connect with peers and industry insiders and engage in a professional community that will empower your career in energy.


MORE FROM THIS AUTHOR
Andreas Exarheas
Editor | Rigzone