Oil's rally peters out as supply shortage fears ease
Daniel Hynes
Senior Commodity Strategist | helping investors and companies navigate macro, political, economic & environmental issues
Highlights
Energy markets remained on edge amid elevated geopolitical risks. Metals also gained amid renewed optimism over demand in China.
Prices and commentary accurate as of 07:00 Sydney/05:00 Singapore/17:00(-1d) New York/22:00(-1d) London.
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Market Commentary
Crude oil prices extended gains early in the session as tensions in the Middle East rose. Israel’s prime minister, Benjamin Netanyahu, vowed to retaliate, after Iran launched a missile attack. Fear of disruptions to oil supplies grew after a report from Axios said Israeli officials are said to be considering a missile attack within days that could target oil production facilities in Iran and other strategic sites. Most of those price gains were reversed as swelling US inventories added evidence that the market is well supplied and can withstand any disruptions. US commercial oil inventories unexpectedly rose last week by 3.89mbbl, according to EIA data. The gasoline inventory recorded inflows (+1,119mbbl). OPEC+ made no change to its plan to start reviving oil production in December. The Joint Ministerial Monitoring Committee instead focused on member non-compliance to the current supply agreement. Earlier in the year, the group said that in December it will start phasing out the 2.2mb/d cut to production, adding around 180kb/d per month. It has several more weeks to decide whether to proceed with the plan. Ministers will meet on 1 December to review the supply policy.
Ample supplies also offset supply risks in global gas markets. European gas futures fell on the belief that the region will be able to withstand supply disruptions by drawing on its stores of natural gas, which are well above seasonal norms. Earlier in the day, Chevron shut its Tamar and Leviathan gas platforms in Israel as a precaution, but they eventually resumed operations. In Europe, supply issues are also rising. Norway’s largest gas field, Troll, is facing an unplanned production cut on Wednesday, the duration of which is unknown. The moves in Europe helped drag North Asian LNG prices lower. Traders in Asia don’t appear to be concerned about disruptions from the region’s suppliers, such as Qatar. Instead, rising inventories in Japan saw buyers pull back from the spot market.
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Gold prices edged lower as haven buying dried up. Geopolitical risks often trigger gold buying, but that can reverse quickly if those risks fade. Investor focus is now turning to the US labour market, with the jobs report due out on Friday. Any sign of weakness could increase expectations that the Fed will continue aggressive rate cuts. Swaps traders are pricing-in a one-in-three chance of another 50bp cut in November.
Copper extended gains in the wake of China’s release of economic stimulus measures. A gauge of Chinese property stocks surged as much as 16% on Wednesday, signalling optimism that the sector can reverse its prolonged decline. Confidence that the economy’s outlook is improving was supported by data showing 2.14m railway trips on the first day of the Golden Week holiday. This suggests consumers are more willing to spend. BHP warned that supply growth will have to double in coming years to meet demand as the world economy decarbonises.
Chart of the Day
Oil inventory in the US unexpectedly rose last week, raising concerns that consumer demand may still be facing headwinds.
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