Summary
The Brent futures complex sharply retraced lower last week as the geopolitical risk premia faded on the prospect that Israel’s retaliation strike against Iran will not be targeted towards its oil or nuclear facilities. The week ending 14 Oct saw Brent have its largest weekly decline since the week ending 6 Sep. Price action in the Dec’24 contract rapidly fell by $3 overnight on 15 Oct from around $77.50/bbl to $74.50/bbl following the release of the Washington Post article before stabilising and trading rangebound between $74-75/bbl. This was followed by a breakout towards the downside on Friday afternoon (18 Oct), briefly falling below the $73/bbl level. Despite the killing of former Hamas leader Yahya Sinwar in Gaza and Israel targeting the financial centers of Hezbollah activity in Beirut, the market is likely to shrug off such headlines until a genuine threat to oil supply is demonstrated. Another bearish factor was OPEC and IEA both cutting their global oil demand growth forecasts, with China’s economic troubles as the common denominator.
Although the flat price saw a large downwards correction, Brent futures spreads remained robust and firmed on the week. This also applied to the flies, where Dec/Mar/Jun rose from $0.31/bbl to $0.60/bbl. The divergence between flat price and structure suggests that the mean reversion in flat price was mainly driven by the fading geopolitical risk which was relatively unrelated to physical market dynamics. The WTI/Brent forward curve also flattened on the week, which came on a combination of a weaker Brent futures alongside stronger Brent spreads in the front.
Looking at the technicals, price action for the flat prices traded within the Bollinger bands with the RSI trending downwards but remaining in neutral territory. Prices came off on 15 Oct and stabilised and consolidated for three trading days near the 20-day simple moving average line in a low volatility environment before breaking out to the downside on 18 Oct. But with prices neither overbought or oversold, it shows that trends are not particularly aggressive nor sustained in either direction. Out of the three selected futures contracts, the gasoil market was relatively weaker on a fading geopolitical risk and bearish demand, while gasoline was better supported on supply tightness concerns.
In the week to 18 Oct, we saw generally bullish sentiment across the crude oil ETF options, driven by a combination of buying calls and selling puts. USO options continued its bullish streak, registering a positive delta volume on every trading day. It was a risk-off week for the UCO ETF options, and notably, retail traders were influential in reversing intra-day sentiment, generating a delta volume of -110k in 2 hours. Finally, the SCO registered a bearish delta on 18 Oct, reflecting market participants’ bullish view on flat price.
Finally, we note that the 30-day correlation between the middle distillates (Gasoil, Heating Oil) cracks and the crude oil benchmarks have increased w/w, from around 0.05 in the previous report to around 0.44 in the current report. The dynamics affecting price action in both markets have become more intertwined with both being sensitive to geopolitical developments in the Middle East.
