Review of Oil Trading Markets - 2024 - 21st to 25th October

Oil prices pushed hesitantly higher this week as traders, investors and hedge funds remained tensely pacing the trading room floor waiting for an Israeli response to Iran’s direct missile attack on Israel on October 1st and whether such a retaliation would impact oil supplies to the world, although the caveat here is this market seems happier these days reacting to media shock and awe reports rather than facts, figures, supply and demand!

Inevitably whatever was in the Israeli strategy would be delivered over a weekend when markets are closed, that much at least was predictable, and as Friday night faded into Saturday morning Israel took a level of revenge which is sure to have traders trying to figure where in the mix of newsreels, wars and physical oil oversupply this action fits in and how it translates into speculative daily trading.

What has been clear in Israel’s strategy is to do whatever it takes to remove the roots and infrastructure of their enemies and this weekend’s actions fell into that plan.

There are various versions of what has taken place but the general one seems the assault on Iran (code named Days of Penitence) was restrained and limited and in a set of sorties under cover of darkness scores of Israeli jets crossed into Iranian territory targeting military and missile fuel production sites.

Oil, civilian and nuclear sites were according to all the reports left untouched.

In oil terms it may be the waiting for Israel to exact their revenge on Iran is over at least for now, however, the question that remains is how will Iran respond, if at all, maybe preferring instead to enter into some kind of less angry arrangement brokered by the U.S. and the GCC countries.

How this plays out from here is anybody’s guess, in the meantime oil markets will wait and see how the leaders of both countries will face off after this weekend’s events.

Tensions will remain in the Middle East and in consequence the oil industry will too, but the main market price driver of fear and uncertainty has been somewhat diluted after this weekend, as a result we may revert to a more fundamentally driven market in the short term with prices likely to continue easing lower once the impact of events has been thought through by the trade, (when major price changing events occur at weekends, the immediate knee jerk and panic reaction from Wall Street is eliminated…at least until Monday morning!)

How oil markets react after this is difficult to call, but short term, traders may well go back to focus on China, especially given Chinese crude oil demand, growth potential and economy remains unspectacular, OPEC’s next move will also come into play with all eyes on Saudi Arabia and whether they will look to regain some export market share especially as the Saudi “autumn” approaches bringing with it lower Saudi domestic consumer demand for fuels as the summer heat wave gives way to milder weather and the rush for fuel to power generators subsides.

Despite Israel finally taking their revenge for the Iranian missile attack on October 1st, the Middle East region remains on a knife edge so the fear factor is still in the market to some extent but it feels less intense as US Secretary of State Anthony Blinken pushes again for a ceasefire in the region during his final days in office before the presidential election.

One new element of rising concern is continuing stories North Korea is sending troops to Ukraine to fight for Russia and whilst that doesn’t have a major impact on oil supply as such, it does keep an element of the tension card in play across commodity markets.

Switching to a more fundamental view of oil today, and particularly products, West African FOB gasoline supply remains tight in the prompt position especially in Europe for Nigerian 50 ppm max sulphur grade.

Since Nigerian President Tinubu deregulated gasoline prices, foreign suppliers are now finding ways to work with local Nigerian oil marketers directly rather than via state run NNPC.

Meanwhile NNPC still remain in heavy dollar debt to traditional oil traders who delivered gasoline some months ago, some of whom remain unpaid and until that situation is resolved bank finance for trading in WAF will continue to trade as a scarcity at a heavy premium.?

Meanwhile Dangote refinery (at its maximum… sometime in 2025… will convert 650,000 barrels a day of crude oil into transport fuels) ?is cranking into life producing some 8,000/10,000 mt of gasoline a day, adding that quantity to supply already on the water from Europe suggests their should be enough to satisfy consumer demand for November but that is only one side of the coin.

The other side being reports that NNPC will sell crude cargoes in Nigerian Naira to Dangote but the major flaw in that process is valuable and vital American dollar inflow for Nigeria will slow alarmingly, balancing the banking book seems the real knot in the chain today.?

Other petroleum products, gas oil, naphtha, and LPG ?appear in reasonable shape and likely to hold their values against crude oil for another week or so subject to Monday morning’s market reaction to Israel’s attacks over the weekend.?

The technical side of the market just became a little harder to read, however.

Many have predicted higher oil prices to come as Middle East tensions soar, and buying options has become a way to participate in oil without taking an outright flat price risk.

For those not so familiar with option plays it’s a way of limiting your price risk and exposure.

In simple terms we would define it as follows, decide at what price you would like to buy or sell (call or put) in the future, and the length of time you need to retain the option, a futures exchange or oil company will grant your wish for an option premium set in US dollars…. It’s akin to insurance!!

During the life of the option you retain the right to buy or sell at your chosen price (the strike price) but as time goes on your option premium becomes less valuable, so beware!

These options can be traded as well as retained.

The fundamentals of the oil markets in 2025 are already unable to justify an increase in bullish positions in Brent futures, but options, generally perceived as a hedging mechanism for volatile periods, serve that purpose perfectly.

For those more familiar with these trades?ICE Brent options surpassed the threshold of 4 million contracts for the first time on record, the equal?of 4 billion barrels, as investors seek to hedge their geopolitical exposure.

This high volume was generated by widespread expectation that Israel would seek to retaliate vis-à-vis Iran around the time of the US presidential elections, potentially leading to a sudden price spike should international waterways be restricted afterward. Well, this weekend Israel did just that, but it remains to be seen how options holders will react to what happened on Friday night and Saturday morning over the skies of Tehran.

Brent call options for the front months of December 2024 and January 2025 now fetch the biggest premium to bearish puts since March 2022, the first month after Russia invaded Ukraine.

On Tuesday this week open interest for ICE Brent futures and options combined reached a new high of 6.4 million contracts.

Should oil markets suddenly turn bearish the cogs of the ICE exchange will be spinning wildly and generating heat for quite some time as investors look to reverse trades !?

In other news, the American election is beginning to loom large, with the outcome looking tough to call.

Polls published yesterday broadly lined up with forecast’s expectations, meaning that the overall numbers did not move and the two protagonists remain neck and neck.

The most substantial change was in?Georgia?(USA!). A poll by Marist showed The Donald and Ms Harris tied in the state. Recently most Georgia polls have shown Mr Trump with a small lead. His odds of winning the state have fallen by two percentage points, to 65%.

How any of this affects oil prices is hard to call, however, in January 2025 when the new president is inaugurated we will have a better idea!?

A tricky week all round and as we enter Halloween week we consider whether oil markets will trick or treat us in the coming 7 days.

This week’s closing guide prices:

Ice Brent 75.90 (+2.36)

WTI 71.78 (+1.99)

Ice gas oil 674.00 (+19.50)

Euro Mogas swaps 708.50 (+10.00)

Euro naphtha swaps 655.75 (+27.25)

Nymex gasoline 2.0785 (+6.32 cents/gallon)

LPG swaps 602.00 (+11.00)

Credit: Robert Haynes - Silvergreen Energy Ltd.