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Market Update

Over the past week, the Dated Brent market has been undoubtedly bullish as physical differentials rose from $0.28/bbl to $0.55/bbl between 28 Oct to 4 Nov. Petroineos have been consistent bidders, whilst Geneva-based trade houses were bidding Forties, lending support to near-term physical demand. Brent’s flat price has been buoyed by OPEC+ delaying plans to increase output, which has also lent support to Brent spreads. In addition, rising gasoil prices have improved refinery margins, providing a more supportive backdrop for crude. The Nov’24 DFL has risen from $0.30/bbl to $0.50/bbl w/w, while deferred spreads have largely corrected higher after initially seeing a drastic drop at the beginning of last week (28 Oct to 01 Nov) following the deflation of geopolitical risk.

The backwardation in Brent spreads and the Dated market have been extremely robust, and crude bulls are in the money. However, the question remains as to whether or not this recent strength is sustainable. Counterparty type data suggests increasingly bearish sentiment in the back-end November and December structure. Here, refiners were the main sellers in Dec’24 and Jan’25 DFL. Meanwhile, on the CFD front, the key selling flows were concentrated in the back-end November weeks from trade houses and majors. Gunvor demonstrated substantial selling interest in the cash spread during December’s Brent future expiry. On the window of 4 Nov, Gunvor offered Brent for a range of dated, withdrawing two offers and was lifted by Petroineos.

Northwest European refinery margins strengthened in the final week of October, driven from a stronger European gasoil complex. The uptrend suggests that the gasoil crack has bottomed out, with the rally driven by prompt tightness and exacerbated by short covering flows. As refineries come out of autumn maintenance, they will be incentivised to take advantage of the stronger margins, which might supported Dated demand in the short-term.

After rallying at market open this week from $72.90/bbl on 01 Nov to $74.35/bbl last night, the Jan’25 Brent futures contract showed steady support this morning, climbing from $74.40/bbl at 07:00 GMT up to $74.70/bbl just after 10:40 GMT (time of writing).

Crude oil prices were elevated amid an OPEC+ decision on Sunday to extend its output cut of 2.2mb/d by another month, initially planning to increase production in December. In the news today, according to a Reuters report, Israel has officially notified the UN that it is cancelling the agreement that regulated relations with the UN relief organization for Palestinian refugees (UNRWA) since 1967, fuelling concerns of a worsening humanitarian situation in Gaza. This came as Palestinian medics claimed Israeli airstrikes killed at least 31 people in the Gaza strip on Sunday.

In other news, China’s refining output is set to fall to 14.7mb/d this quarter on thin margins and weak demand, in addition to maintaining lower run rates in Q1’25, as per Reuters. Finally, Eni has sold $1 billion worth of upstream offshore assets in Alaska to US private company Hilcorp, planning to raise €8 billion in net proceeds between 2024-2027 to fund the growth of its low-carbon units. At the time of writing, the Jan/Feb’25 and Jan/Jul’25 Brent futures spreads stand at $0.41/bbl and $1.42/bbl, respectively.

Summary

The market appears to be stuck in a bout of geopolitical ping-pong between Israel and Iran. Following last week’s decline in risk after Israel attacked Iranian military sites, leaving the country’s oil and nuclear infrastructure unharmed, the Jan’25 Brent futures contract declined to an intraday low of $70.30/bbl on 29 Oct. However, sentiment recovered in the remainder of the week, causing the futures contract to finally break past the critical resistance point of $75/bbl on 04 Nov and trade at $75.25/bbl at the time of writing (12:00 GMT). The Jan/Feb’25 Brent futures spread recovered from an intraday low of $0.30/bbl on 29 Oct to an intraday high of $0.46/bbl on 01 Nov, where it met resistance. This recovery emerged amid Iran threatening to retaliate against Israel’s attack, injecting further risk into the market.

OPEC+ also announced on 03 Nov that they intend to extend their output cut of 2.2mb/d by another month after previously stating these barrels will be gradually brought online from December onwards. The decision appears an attempt to buoy oil prices in the face of rising concerns of oversupply. Oil production in the US shot up to a new high of 13.4mb/d in August 2024. Exxon, in its Q3’24 results, announced a rise of 25% y/y in oil and gas production. Finally, the market will await 05 Nov’s US Presidential election for further certainty on oil sentiment.

Nonetheless, the past week recorded some support for the Jan’25 ICE Brent, ICE LS gasoil and NYMEX RBOB gasoline futures. While longer-term moving averages indicate more stagnant price movements, shorter-term moving averages showcase an improvement in sentiment, with the MACD line now surpassing the Signal line (the MACD line’s 9-day MA).

A correlation analysis highlights a slightly less positive correlation between RBOB and middle distillate cracks, with the RBOB crack noting a little more pressure from crude rising relative to ICE LS gasoil and NYMEX heating oil cracks, with the latter two more positively correlated with Brent than RBOB cracks.

The WTI/Brent swaps structure shifted up this week, maintaining the trend noted over the past few weeks. Interestingly, the 12-month Brent futures forward curve fell w/w, further intensifying the relative support in WTI futures. It will be interesting to see how this support for WTI is impacted by the US Presidential Elections.

Finally, the week ending 01 Nov saw sentiment turn bearish for a number of oil ETF options, largely driven by calls being sold at the start of the week on news of Israeli strikes doing no damage to Iranian energy infrastructure. Although traders ultimately bought calls, they also significantly raised their put open interest this week.

In the week ending 29 October, Brent and WTI futures inched up but then saw pressure as they gapped down on 28 Oct as the risk premia built into their flat prices saw a significant reduction due to the Israeli strikes on Iranian military sites being seen as non-excitatory.

Both WTI and Brent gapped down on the open, and there was better support at these lower levels. The geopolitical landscape has changed to feel less risk-on, although the rhetoric from Iran has ramped up a bit this week. Still, it will not be represented in the COT data next week. Both WTI and Brent saw an increase in short positions for the second consecutive week, with their total open interest increasing by over 2.00% (82.9mb).

Short interest from funds in Brent Futures by around 9.8mb (11.05%) and a 16.8mb (28.0%) drop in short interest in WTI. The long:short ratio fell from 2.47:1.00 to 2.07:1.00 w/w (7th percentile for all weeks since 2013). Prod/Merc players continued to have a risk-on week, with both longs and shorts increasing their positions by 64mb and 36mb respectively.

The Jan’25 Brent futures contract initially saw weakness this afternoon, trading from $75.25/bbl at 12:00 GMT down to $74.30/bbl around 15:50 GMT, before recovering to $75.15/bbl at 17:45 GMT (time of writing). Despite profit-taking flows, prices overall have been supported following the OPEC+ decision to delay a production hike for another month.

In the news today, according to a Reuters survey, OPEC oil output was up 195kb/d in October m/m, with Libya posting the largest gain of up to 400kb/d. Crude oil production in Venezuela reached 860kb/d, the highest since at least 2020, while Iraq cut crude oil output by 120kb/d, amid lower exports and domestic consumption. In other news, developing Tropical Storm Rafael is projected to strengthen into a hurricane late Tuesday as it moves northwest from the Caribbean towards offshore oil production areas in the Gulf of Mexico, as per the US National Hurricane Center.

Finally, according to Argus Media, Asia-Pacific refiners have increased their intake of US light sweet WTI for November loading, buying around 1.3mb/d of WTI loading compared to roughly 800kb/d in October and could remain keen buyers in December. Meanwhile, European demand for crude is expected to rebound in December following the end of autumn refinery maintenance, with Ekofisk adding around 60c/bbl relative to WTI since mid-October. At the time of writing, the Jan/Feb’25 and Jan/Jul’25 Brent futures spreads stand at $0.42/bbl and $1.57/bbl, respectively.

HEAD OF RESEARCH REVIEW

ICE Brent briefly moved above $80/bbl in early October as Iran, for a second time since April, took aim at Israel, launching some 200 ballistic missiles, exposing holes in Israel’s Iron Dome defence system. Israel initially pressed its advantage in southern Lebanon against Hezbollah and, through a chance encounter in Gaza, killed Hamas leader Yahya Sinwar, the architect of the 7 October 2023 terrorist attacks. In the early morning hours of Saturday, 26 October, Israel chose to strike back. The much-awaited retaliation was underwhelming, given initial vows of “lethal” and “surprising” retaliation. Israel stayed clear of oil infrastructure, nuclear, or leadership objectives. The US could not have hoped for a better outcome. The market could breathe a sigh of relief; the known unknown that was Israel’s eventual response was resolved, and Iran does not look, at the time of writing, like it wants to up the ante, albeit its recent rhetoric is on the more bellicose side. This morning, Brent was trading just under $75/bbl and is back to facing poor supply/demand fundamentals. Without a strong geopolitical premium to prop up the flat price, there is a good chance for oil to test a move into the high 60s eventually on negative economic data surprises.

What matters is the perceived risk to oil production and transit; once again, this has faded. This does not mean the market is now ignoring risk altogether, as evidenced in the options market. However, the perception of the risk has changed, perhaps thanks also to recent diplomatic activity between Iran and Saudi Arabia. The narrative has reverted to poor macroeconomic realities and implications for oil demand in the face of matching non-OPEC supply growth and a potential return of OPEC+ barrels. The narrative has also increasingly become concerned with the outcome of the US presidential election due on 5 November. The shift occurs against a background of money managers who are still hesitant to deploy any measurable length in oil.

On the economic front, unsurprisingly, China took centre stage. The latest figures showed the country’s Q3 GDP y/y growth at 4.6%, which would require a strong rebound in activity in Q4 to achieve 5% growth overall in 2024. Clinching that target, in our view, will be very difficult. Thus, the country’s oil demand growth in 2024 will likely end up closer to the International Energy Agency’s (IEA) conservative forecast of sub 200 kb/d than the OPEC Secretariat’s enthusiastic estimate of nearly 600 kb/d. After a barrage of monetary policy easing by the PBOC, more likely to help China’s financial sphere than its real economy, the market eagerly awaited the announcement of fiscal measures against a deflationary background. The market was disappointed: guidance from China’s Ministry of Finance on 12 October focused on plans to alleviate debt constraints for local governments and issue special CGBs to replenish core tier-1 capital of major state banks. The size of these programs was not disclosed at the time of writing.

However, specific support for consumption, in addition to existing vouchers or trade-in subsidies, was conspicuously missing. To gain more clarity, we would need to wait for the outcome of the National People’s Congress Standing Committee. New forecasts from the IMF revising its 2024 growth for China to 4.8% from a previous estimate of 5% (while keeping a forecast at 4.5% for 2025) alongside warnings from Managing Director Kristalina Georgieva of China’s growth potentially decelerating “way below 4%” if “it does not move” toward economic reform did not help lift sentiment. Economic weakness in China was accompanied by more disappointment in Eurozone PMI readings. The Eurozone’s flash October composite index stabilised but was in contractionary territory. Germany’s reading ticked higher but is still contracting, while France’s data exceeded expectations. But it is towards the US that the market is focusing its attention. Better-than-expected data and US ‘economic exceptionalism’ of late suggest the Fed will be in no rush to cut rates and is most likely to look past the weakness in the ISM manufacturing and payroll numbers for October due to exceptional factors, including hurricanes and a strike at Boeing. A slow easing cycle, or even the Fed entertaining ideas of a pause, would moderate risk appetite at the very least.

Given the above, global oil demand cannot be expected to produce any upside surprise for Q4 nor Q1 next year, leaving the question of the return of OPEC+ barrels in plain sight as non-OPEC supply growth is expected to match demand growth. OPEC+ decided to delay a potential return of its barrels to the end of December. Market conditions won out. While the IEA’s global balances show implied stock builds for Q4 and each quarter in 2025 if OPEC+ cuts are kept in place, this does not preclude OPEC+ from eventually tapering voluntary output cuts, using the pretext of low OECD crude stocks, which are at the lower end of their recent five-year range. OPEC might hope that any ensuing oil supply surplus may weaken the forward curve’s shape but spare flat price from falling precariously.

Geopolitics is not all about the Middle East or the war in Ukraine, where North Korean soldiers have popped up to lend a hand to Russia. The US presidential race and its potential fallouts are front and centre of the agenda. While polling data give the lead to VP Kamala Harris, the betting markets favour former president Donald Trump. With Mr Trump gaining an edge, according to the bookies, the financial markets seem to have adopted the story that his presidency will lead to much higher debt issuance than that of Ms Harris (at least according to the Committee for a Responsible Federal Budget) and consequently will prove more inflationary if implemented. Pundits point to record gold and silver prices and higher bond yields as testimony to this prognostication alongside the selling of prominent family offices’ US bond holdings.

Portfolio hedging relative to this event risk and the flow it generates is one reason behind the recent increase in yields. If market-based measures of US inflation expectations like the 5-year breakeven, 5-year inflation swaps have steadily risen since the beginning of September, they did not noticeably jump higher in October in unison with betting markets handing the victory to Mr Trump. Instead, rates of TIPs (a proxy for the real rate) have improved with better US economic data, driving the nominal yields higher.

If inflation expectations do move higher with a Trump win, then perhaps oil is likely to be used, like gold, as a hedge. However, the implications of a second Trump presidency for oil are not so straightforward, notwithstanding the above. Deregulation in the oil sector can help boost production and exports, albeit the days of ‘drill baby drill’ in the US shale patch are likely behind us. On the other hand, foreign policy can be a double-edged sword. Countries like Venezuela and Iran may come under more coercive measures and sanction implementation despite their efforts to cosy up to BRICS countries. The course of the war in Ukraine may change if Mr Trump can broker a deal with Russia, changing the global energy outlook. And what of the Middle East? Mr Trump’s relations with Saudi Arabia and Israel are very different from those of the Biden-Harris administration. Foreign policy also extends to economic choices and the escalation of tit-for-tat tariff measures, impacting economic growth globally. The oil market faces great uncertainty. Pragmatism would suggest that investors wait to see where the chips fall before plotting their course of action, thus likely keeping positioning relatively neutral while waiting for concrete policy announcements by the victor.

The Jan’25 Brent futures contract strengthened this morning from $74.05/bbl at 07:00 GMT up to $74.65/bbl at 10:10 GMT, before coming off to around $74.30/bbl at 10:35 GMT (time of writing). Crude oil prices saw support amid reports that Iran is preparing a major retaliatory attack on Israel by proxy from Iraq in the coming days, with US officials continuing to work towards an Israel-Lebanon ceasefire deal in the meantime.

In the news today, Israel hit Beirut’s southern suburbs with airstrikes aimed at Hezbollah assets early this morning, in the first such strikes in days targeting the dense urban area. In other news, according to S&P Global, Russia is not planning to lift its gasoline export ban early due to ongoing refinery turnarounds and high retail prices, after Russian officials indicated in September that the ban could be lifted early on the condition of a gasoline surplus.

Turnarounds are expected to continue at several Russian refineries into the first half of November, including the Norsi, Ryazan, and Volgograd facilities. Finally, a Ukrainian drone has crashed into an oil depot in Russia’s Stavropol region, reported by a local governor Vladimir Vladimirov on Telegram.

This follows yesterday’s drone attack on the Russian region of Bashkortostan, where major oil company Bashneft operates several large refineries. At the time of writing, the Jan/Feb’25 and Jan/Jul’25 Brent futures spreads stand at $0.41/bbl and $1.33/bbl, respectively.

In High Sulfur Fuel Oil (HSFO), the huge 3.5% rally may have stalled, with the front crack reaching a new high of -$7.10/bbl on 30 Oct. The strength seems to have softened since, with Dec’24 dropping to -$8.55/bbl on 1 Nov. Dec’24 380 E/W fell saw its strength wane, unable to hold rallies above $9.75/mt. Dec’24 E/W open interest dropped to 8.4mb on 15 Oct but rose to 9.5mb by 30 Oct, indicating profit-taking. Dec’24 Visco saw small gains, peaking at $12.50/mt on 1 Nov, with net buying amid low liquidity and minor day-to-day changes.

In Very Low Sulphur Fuel Oil (VLSFO), the complex saw a fortnight of two halves and increasing price volatility. Bullish sentiment was initially driven by supply tightness concerns and limited prompt availability, and further buoyed by Middle East geopolitical risk. Refinery maintenance also contributed to the scarcity of blending components. The Nov’24 Sing 0.5 crack initially rose above $15/bbl on 24 Oct before selling off to $13/bbl before rising to $14.50/bbl by 31 Oct. The fluctuations were influenced by rumours of increasing supply out of a Malaysian refinery which later turned out to be unsubstantiated. Trade houses bought Sing 0.5 spreads on the dip, we noted spread buying interest down the curve from Nov’24 into Nov’25. Europe was similarly strong on arb buying interest alongside spread buying from European hedgers and US physical players.

Open interest (OI) in VLSFO contracts has surged, with the M1 Sing 0.5% crack rising to 22mb, far above the 5-year average, and the M1 0.5% barges crack increasing by 22% over the fortnight to 10.2mb. However, OI in deferred tenors remained low, with Q2’25 in both these contracts at 3.2mb and 6.1mb, respectively. OI in HSFO increased significantly, with M1 3.5% barges crack OI surpassing the historical average, currently at 25.4mb.

Looking at the 30-day correlation we saw a weakened positive correlation between the 3.5% barge crack and the Brent and Dubai crude benchmarks, with the coefficient falling from 0.3 to 0.1. The correlation between the 3.5% and 380 cracks strengthened, rising from 0.34 to 0.74 over two weeks. However, the 380 crack became less correlated with the 380 East/West, falling from 0.88 to 0.47, indicating that different fundamentals are driving the individual markets.

Freight continued to be weak, with the M1 TD5, TD3C and TD20 all sustaining a net loss in the past two weeks. The largest fortnightly loss was in M1 TD3C, which lost 13% of its value from two weeks ago. Losses in freight may be due to the easing of geopolitical risk in the Middle East. It also may point to the market not believing there will be a return of OPEC barrels in December or the ARA flow cut from the Dangote RFCC.

Q1’25 refinery margins have recovered in both Europe and Asia, seeing increases of 65c/bbl and 90c/bbl, respectively. While weakness in gasoil and Sing 10ppm persisted, strength was added through propane and naphtha products amid lower crude.

The Jan’25 Brent futures contract weakened this afternoon, moving from the $74.30/bbl level at 12:00 GMT down to $73.30/bbl at 17:30 GMT (time of writing). Crude oil prices sold-off 80c just after 14:20 GMT, declining to $73.47/bbl at 14:50 GMT, amid the release of US manufacturing PMI data at 14:00 GMT showing a contraction to 46.5 in October, compared to a forecast of 47.6.

In the news today, according to a Bloomberg report, oil supplies from OPEC increased by 370kb/d to 29.9mb/d in October, with Libya adding 500kb/d after the end of the central bank feud and Iraq cutting 90kb/d.

In other news, Venezuela’s oil exports have reached a four-year high, approaching 950kb/d in October, as per Reuters. The boost in oil exports is the result of increased crude output and more sales to India and the US, according to ship tracking data.

Finally, Exxon reported $8.61 billion in their Q3-24 earnings, down 5% y/y, while hitting a 40-year liquids production high at 3.2mb/d. Meanwhile, Exxon has sold the Fos-sur-Mer refinery in France to a consortium composed of Entara and Trafigura. At the time of writing, the Jan/Feb’25 and Jan/Jul’25 Brent futures spreads stand at $0.38/bbl and $1.27/bbl, respectively.

The Jan’25 Brent futures contract initially was rangebound between $74 and $75.50/bbl into the week ending 29 Oct. However, the Jan’25 contract sold-off on 28 Oct to an intraday low of almost $71.00/bbl, following Israel’s 26 Oct retaliation on Iran.

Prices were pressured down amid fading geopolitical risk premia, with Israel’s attack solely targeting Iranian military targets and leaving nuclear and oil infrastructure unscathed. In line with this weakness, Onyx’s weekly CFTC COT predictor anticipates a large reduction in speculative long positions in Brent alongside an increase in shorts for the week ending 29 Oct.

In addition, we expect producers/merchants to be risk-off, removing 2.6mb in longs and 17.6mb in shorts, while other reportable players are projected to add 5.1mb in longs and remove 14.4mb in shorts.