Here is Rystad Energy’s oil macro update from Chief Economist Claudio Galimberti:
“Fast escalating geopolitical risk is driving oil prices higher this week.
The intensifying conflict in the Middle East is generating significant supply concern in the global crude market, with prices up more than 4% this week.
"The potential for supply disruptions – particularly, but not exclusively from Iran – increases as the fighting intensifies.But OPEC+ still sits on unusually ample spare capacity, which is the result of successive production cuts over the past two years.
"This spare capacity is for now preventing runaway prices amid one of the deepest and most pervasive crises in the Middle East in the past four decades.”
Last week, the US government reported the final estimate of GDP growth and the PCE index, showing solid economic expansion and cooling inflation.
Simultaneously, China’s manufacturing showed contraction, where bearish sentiment for a sluggish economy continues to linger, and therefore the market is perhaps awaiting further monetary and fiscal support from China, while keeping an eye on US macroeconomic data to gauge the likelihood of a soft landing.
The final estimate of US GDP showed 3% growth in the second quarter, in line with the consensus, according to data published on 26 September.
The US PCE price index increased by 0.1% in August, resulting in a year-over-year inflation rate of 2.2%, below the forecasted 2.4% and getting closer to the Federal Reserve’s 2% target.
Despite these positive economic results, the momentum for oil prices generated by the US rate cuts last week failed to sustain based on skepticism regarding China’s stimulus package.
Additionally, volatility for oil surged on 26 September from anticipated supply increases from Saudi Arabia and Libya, which contributed to the further downward spiral on prices.
Rystad Energy’s updated US oil production outlook remains mostly unchanged from the previous update with a marginal upside for the rest of 2024.
Crude and condensate supply is estimated to increase by 280 000 bps in 2024, and 356 000 bpd in 2025.
Hurricane Helene affected oil and gas operations in the Gulf of Mexico last week, causing a scale back in operations and evacuations from some offshore production sites, while Rystad Energy is yet to estimate the impact.
On the refining front, South Korean production is expected to decrease to 2.77 million bpd in September from 2.95 million bpd in August due to weak margins, delayed crude shipments and maintenance, reflecting a wider trend of declining refining margins globally, also due to oversupply associated with lower demand for gasoline and diesel in Europe, Asia and the US.
In China, the Yulong refinery complex began operating one of its crude units, though the anticipated increase in crude production could lead to a domestic surplus of gasoline and diesel, complicating the refining landscape.
As China’s economic situation evolves, Rystad Energy has adjusted its forecasts for the country’s oil demand for the latter half of 2024 to average 16.7 million bpd, a reduction of 330 000 bpd compared to the previous outlook.
Total demand growth in 2025 is now estimated to be 75 000 bpd, down from 290 000 bpd.
China’s manufacturing PMI reported on 29 September rose to 49.8 from 49.1 in the previous month.
While the number increased and came out higher than the market expectation of 49.5, it remains below the 50 mark, which still suggests contraction.
Despite last week’s surprising draw of 4.5 million bbls in S. crude stocks – significantly higher than Rystad Energy’s anticipated 1.4 million – the impact on Brent and WTI prices remained unchanged.
The global balances are anticipated to remain tight for the latter half of 2024, but clear signs of a recovery in Chinese demand are required for bullish sentiment on prices.
As of 2 October, the crisis in the Middle East is intensifying, with increasing risks to oil supply.
Currently, Iran produces approximately 4 million bpd of crude, exporting about half of that, mostly to China.
In the event of a war directly involving Iran, the risk of reduction to its crude exports would become real.
Yet, OPEC+ spare capacity currently sits at more than 5 million bpd, which could be deployed relatively quickly (within 60 days) to fill the gap.
However, if the Strait of Hormuz were to be impacted, then all bets would be off.
In fact, more than 13 million bpd of crude passed through the strait in 3Q24, and flows were as high as 15 million bpd in 1H23.
Any blockage to the strait would result in runaway prices, increasing quickly and steadily the longer the blockage persists.
On the macro side, this week, the focus will be on the labour market as several key releases are expected, although further stimulus announcements from China are also anticipated.
The unemployment rate for September is projected to remain at 4.2% in the US, while it is expected to decline to 6.4% in Europe.
Eurozone inflation dropped to 1.8% in September, down from 2.2% in August, reinforcing the argument for a rate cut this month.
In addition to inflation, labour market data will be tracked as an additional indicator to gauge the rate cut size in the coming months.
Recent inflation-related data has been relatively positive, cooling down towards the government’s target, yet some remain worried about the rising unemployment levels in 2024.