Oil markets play?pinball…

A difficult week for many.

Oil markets found themselves caught in a whirlpool of information and disinformation as prices banged around like a pinball hitting the flippers of a favourite arcade machine. Markets have been wild this week and a challenge for traders, hedge fund managers and investors alike. During the last 7days only a “pinball wizard” had a chance to come out of this week ahead of the game!

CE Brent traded in a wide range, a high of 80.93 on Monday and a low of 76.58 on Wednesday but despite the volatility, Friday night’s close left crude oil’s benchmark just 76 cents higher on the week. The market’s initially flipped around on two main drivers, the backdrop of wars raging on in Ukraine and the Middle East and the uncertainty of the Chinese economy but as the week pushed along, oil prices became ever more sensitive to every word of a verbal tug of war between Joe Biden’s administration and Benjamin Netanyahu’s Israeli Defence Force commanders, as both were pulled this way and that over when Israel would attack Iran as retribution for Iran’s missile attack on Israel two weeks ago, the burning question being what exactly the Israelis would attack and whether that destruction would destroy oil related infrastructure. The fear remains that whatever they do, the whole thing could catapult across the Middle East and embroil the Gulf Cooperation Council countries, Bahrain,Kuwait,Oman,Saudi Arabia and the United Arab Emirates in a war that would almost certainly impede their oil flows.

The situation has become very complicated, the U.S. certainly wouldn’t want a full blown Middle East oil crisis 4 weeks before a Presidential election especially given they have significant air force and troop presence in Saudi Arabia. In that connection an attack on one or all of the GCC countries could be interpreted as being one on America, conversely, the Iranian viewpoint is should the GCC countries allow Israeli fighter jets across their airspace that too would be considered an act of war.

With so much at stake, diplomatic efforts to persuade all to pull back from the brink continue but so far they have failed and as a result, oil prices will continue to operate like a pinball machine that has flipped out of control. The Chinese economy remains large in the oil market picture as an alternative to everything that is happening in the Middle East, news from that region can inflate or deflate oil markets in one sentence. The latest news suggests the Chinese government will inject $325 billion into the banking system by issuing bonds to help banks, the property market and stimulate consumer demand but this plan would appear to be supported by debt and details of how it is to be implemented remain sketchy for now.

China remains a key indicator of Global crude oil demand and heavily impacts prices but in recent months,slowing imports and frequent announcements of yet another new plan to boost their struggling economy suggests the Chinese influence on oil markets is losing it’s bite. The excellent Vortexa reminds us that crude oil imports into China have dropped in September 2024 to 9.7 million barrels a day (versus a record 11.29 mbd in 2023),perhaps the biggest factor weighing on crude oil imports in 2024 and the coming years is China’s transition to what it calls new energy vehicles (NEVs), which include fully electric cars, trucks and hybrids according to a Reuters report. If this is really the case then Chinese crude oil imports may remain at gently lower levels as the years go by.

We should also note that from January to September, China imported 4.2 million barrels a day of crude oil via the Straits of Hormuz which accounted for 43% of its seaborne crude imports and that included 1.35 mbd of discounted Iranian crude oil and condensates… a 27% year on year increase in imports from Iran (thanks to Vortexa for the statistics) (It’s worth repeating that should the Straits of Hormuz ( controlled by Iran) become blocked as a result of the Iran/ Israeli war, around 30% of the World’s oil supplies would be shut in, it’s that serious.)

In the meantime, profitable Chinese refining margins are everything and today they are very poor indeed, should oil prices at some time in the future drop into the low 60’s or even lower we can be sure China will refill their tanks at those cheaper numbers rather than at today’s war filled prices so influenced by the fear of what happens next.

It’s very tough to second guess how oil prices will bounce around during the coming week, and whilst many are loading up with options strategies as protection against a market that could flip higher at alarming speed, it’s worth remembering that ample physical global oil supplies remain sufficient to cover weakening autumn consumer demand.

In other news….

Libya’s total oil production reached 1.22 million b/d by the end of this week, restoring production to levels before the central bank crisis and subsequent oil embargo, with oil exports already picking up and seeing the first Mellitah export in two months.

Nigeria’s state-owned oil company NNPC has hiked gasoline prices by over 15%, marking the second increase in less than a month and the scrapping of the African country’s costly fuel subsidy, heralding the first time that Nigeria is selling gasoline to consumers at market prices.

Russian President Vladimir Putin is holding talking with his Iranian counterpart, Masud Pezeshkian, as the crisis in the Middle East continues to threaten to spin out of control. The two leaders are meeting in Ashgabat on October 11 on the sidelines of a conference in the capital of the tightly controlled Central Asian country of Turkmenistan. It’s the first of two meetings between the two, with another scheduled at the BRICS summit in the Russian city of Kazan that runs October 22–24.

This week’s closing guide prices:

ICE Brent 78.79 (+0.76)

WTI 75.56 (+1.16)

ICE gas oil 706.75 (+1.50)

Euro Mogas swaps 747.25 (+28.50)

Euro naphtha swaps 675.50 (+0.75)

Nymex gasoline 2.1516 (+6.71 cents/gall)

LPG swaps 614.50

Opec basket 77.23