In a report sent to Rigzone by the Fitch Group on Friday, analysts at BMI, a unit of Fitch Solutions, noted that oil prices have “come under pressure” heading into the fourth quarter, pointing out that Brent futures were down around five percent week on week.
“This is largely due to the rollover from November to December expiry in the front month contract in a steeply backwardated market,” the analysts said in the report.
“Bearish news flow around rising exports from the Middle East Gulf and the restart of the East-West pipeline, and some optimism over the potential for a U.S.-Iran deal has also played a part,” they added.
The analysts warned, however, that other market indicators showed continued signs of strain.
“The term spread remains deep in backwardation and physical barrels are holding sizeable premiums to paper barrels, both typically a marker of fundamental tightness,” they said.
“In the downstream market for fuels, price pressures remain even more acute, in particular for diesel,” they added.
“Diesel prices have reached new record highs once again this week and there are signs that this is starting to put more upward pressure on the price for gasoline, as refiners favor the middle distillate yield, squeezing light end production,” they continued.
The analysts went on to reveal in the report that, in an “extended conflict scenario”, they hold a bullish outlook on prices for crude and fuels.
In a market analysis sent to Rigzone today, Naeem Aslam, CIO at Zaye Capital Markets, outlined that the oil market is currently balancing two opposing forces.
“Supply disruptions and geopolitical risk are keeping a premium in crude, while recovering Gulf exports and concerns about future demand are limiting a cleaner breakout higher,” Aslam said in the analysis.
“Tight distillate markets, reduced refined-product availability, and uncertainty around Middle East shipping continue to support prices, but any evidence of stronger supply flows can quickly trigger profit-taking,” he added.
Aslam also noted in the analysis that U.S. President Donald Trump’s latest comments are adding to volatility.
“His warning that military action against Iran could resume keeps the Strait of Hormuz risk premium firmly in the market, because traders must still account for the possibility of renewed disruption to one of the world’s most important oil transit routes,” Aslam said.
“At the same time, his comments that oil could ‘drop like a rock’ once the Iran conflict ends, that the U.S. has recently moved more oil through the Strait, that Europe may be asked to release diesel stocks, and that Venezuelan crude could eventually help refill the Strategic Petroleum Reserve all point toward efforts to increase effective supply and reduce fuel prices,” he added.
Aslam highlighted in the analysis that OPEC+ is also “central to the outlook, with markets watching whether production policy remains unchanged or begins to shift as prices stay elevated”.
He noted that the International Energy Agency’s (IEA) latest outlook “adds another layer by warning that high energy costs and disrupted trade routes are beginning to weigh on demand even as global supply remains constrained”.
In an oil and gas report sent to Rigzone late Thursday by the Macquarie team, Macquarie strategists, including Macquarie Energy Strategist Walt Chancellor, highlighted that oil flows through the Strait of Hormuz continued to rise, “with recent levels pushing the global oil balance closer to equilibrium”.
“For the week ending September 29, we note just under 11 million barrels per day of crude/clean product through the Strait and nearly 10 million barrels per day since the resumption of hostilities on August 30,” the strategists said.
“Indeed, alongside this rise in volumes, global crude inventories appear to be drawing at a slower rate since the end of August, aided by resurgent oil-on-water,” they added.
“Nevertheless, the currently roughshod nature of rebalancing largely via dark transits through the Strait of Hormuz and ship to ship transfers may leave oil markets somewhat unsatisfied,” they warned.
“The bulk volumes may be improving, but with a steady pull on freight resulting, for crude purchasers, the market still may feel quite far from ‘normal’ or even a ‘new normal’,” they continued.
The Macquarie strategists noted in the report that this dynamic is reflected in physical crude strength, “where ongoing Middle East supply uncertainty, elevated freight costs, and robust refining margins continue to support crude differentials”.
“While we think a degree of desensitization to kinetics in the Strait may ultimately help navigate the crude market (Tanker Wars), conflict and escalatory cycles still matter, increasing risk premium and snarling logistics, even if flows prove resilient,” they said.
HSBC analysts, including Jamie Culling, HSBC Economist Australia, New Zealand, and Global Commodities, highlighted in a HSBC report sent to Rigzone on Thursday that an escalation in conflicts in the Middle East and Black Sea region were “key factors underpinning a rise in oil prices in September”.
“The Strait of Hormuz continues to be disrupted with no agreement between the U.S. and Iran, shipping via the Bab el-Mandeb Strait has now fallen sharply, and Saudi Arabia’s East-West pipeline was briefly closed following attacks,” the analysts pointed out.
“For crude oil, U.S. inventories have now fallen sharply, and China’s oil imports have started to recover, raising questions over ‘tank bottoms’,” they added.
The analysts went on to note that refined and downstream products continued to exhibit more tightness.
“Diesel … and ‘crack spreads’ reached fresh record highs as the U.S. began examining export restrictions,” they pointed out.
“The Middle East conflict, damage to Russian refineries, and Russia’s export ban and shift to importing diesel had already tightened the market,” they added.
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