I don't know why oil prices are falling.

I share these personal reflections in case they are of any use to anyone.?

I don't know why the price of oil is falling.

I probably should know, but I do not.

At a glance, I would say that the fall in the price of oil must be framed within the prevailing mood, or rather discouragement, about the economy at this time; because the truth is that the news I read about crude oil does not seem to me, in my humble opinion, to be negative.

For example:?

1.???????? OPEC plans to cut production next year, at least until March, by an additional 900 kb/d; which in principle should resolve the question of whether we are facing a surplus or a deficit, as stated in the IEA and OPEC reports.

According to the IEA in 2024 we would be in a small surplus of around 300 kb/d; and according to OPEC we would be in a deficit of around 900kb/d.

Well, if we assume that the announced cut is extended to the whole year, something that is becoming common in recent times, OPEC's announcement should leave the market in a deficit even assuming that only 1/3 of the announced cuts are met and assuming the IEA's most conservative demand scenario.?

2.???????? On the other hand, the Hamas-Israel conflict and the recent attacks in the Red Sea should not be topics of celebration and celebration for oil users, but rather the opposite.?

3.???????? US refining volumes, a proxy for demand, have been above last year's levels for much of the year, at least until October, when with the annual refinery maintenance period.? However, in yesterday's data refining volumes appear to be recovering and closing the gap with 2022. A good sign.

And while it is true that the increase in refining volumes has produced, in yesterday's data, an increase in gasoline inventories (+5 Mb) this has been offset by declines in oil and non-oil inventories. In total oil + products inventories including Strategic Reserves yesterday decreased by 1.4 mb. By the way, the gasoline volumes that have increased last week are not even gasoline but chemicals used in gasoline blending, which saw their inventories increase by +3.9 Mb.

https://ir.eia.gov/wpsr/overview.pdf

?THE THICKEST LINE IS REFINED VOLUME 2023.

?4.???????? Oil and product inventories remain at historically low levels; and at least in the US, not above those seen last year, when the price per barrel was in triple digits, at least until yesterday's data.

All this makes me think that perhaps the justification for the fall in the price of oil should not be so much in the current supply/demand; but rather in the expectations about future demand.

On skepticism regarding expectations of the strength of the economy, there are plenty of indications; but if I had to point to one, it would be that the market expects Fed rates to be about 125 bps lower by December next year; between 400 and 425 bps versus the current 525-550 bps. Without being an expert, this seems to me to be somewhat exaggerated, especially if one listens to Powell who does not seem to have it so clear.

While part of this expected decline is due to the good inflation data that we are seeing at the moment, a large part is justified, it seems, by expectations of a major economic slowdown next year. (It's like deja vu, isn't it?).

Indeed, markets are reacting with significant declines in bond yields to any weaker-than-expected data, even if that bad data then proves short-lived. As happened a few weeks ago with the spike in jobless claims to 223m (probably due to a bad seasonal adjustment) and which marked the beginning of the oil downturn.

INITIAL JOBLESS CLAIMS

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Yesterday, in fact, the JOLTS (job openings in the US) came out worse than the consensus. But, even though they came out worse than expected, the number of unfilled vacancies is still extraordinarily high and consistent with an also high wage growth. Keep an eye on the data.

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JOLT RED LINE. WAGE GROWTH BLUE LINE (U.S.)

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I know you are going to tell me that what matters is the trend, and that the number of vacancies is falling.

OK!!!

But if it's the trend that matters, we should be very happy, because clearly the trend in the data we are seeing is upward, right?

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For example, the GDP estimates in the US, and those in China, and the latest PMI composite data in Europe, and also the ZEW, and also the German IFO, point to an economy that has hit the ground and is rising, on low levels of activity, but if what matters is the trend we should be happy, right?

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EUROPE COMPOSITE PMI. CHINESE MANUFACTURING PMI(blue)

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IFO(blue) AND US MANUFACTURING PMI.

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I believe that the correction in oil is largely due to expectations of an economic slowdown rather than to the fundamentals of crude oil itself.

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And in my humble opinion I believe that the market is discounting a fairly negative economic scenario that could be reversed if for example Friday's employment data does not come out as bad as bonds seem to be discounting.

We will see.

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