Oil prices flirt with $100 handle

• WTI crude has risen to $90.35 per barrel (bbl) at time of writing, with a $93.44 high
• Brent crude oil has risen to $93.48 per barrel (bbl) at time of writing, with a $95.66 high
• The US dollar index has risen to 105 with strong momentum

Strong technical position boost oil prices

Brent has pushed on to fresh year-to-date highs above $95/bbl, as concerns surrounding tight crude supplies continue to dominate oil markets. Technical factors have contributed to recent strength.

Hedge funds have continued to pour into the energy complex, motivated by the tightening supply/demand conditions. Speculative futures long positions on the ICE and COMEX exchanges have risen by 27,000 positions last week.

The Brent Dec 23/Dec 24 spread, a key benchmark for forward curve sentiment, has risen to almost $10.0/bbl, up from $3.75/bbl on 24^th August. The curve is seeing its greatest backwardation level (when the spot price is higher than the upcoming futures prices) for 14 months.

Tightening supply is an explanation for forward oil prices curve

The International Energy Authority (IEA) stated that it believes the extension of OPEC+ supply cuts to the end of 2023 will sharply tighten market supply conditions in Q4, and it sees Asian demand remaining strong for the remainder of the year.

Russia’s middle distillate exports for September were already scheduled at around 950,000 barrels per day (bbd) before the halfway point in September, with this figure likely to rise before the end of the month despite the beginning of autumn refinery turnarounds.

Over the past six months, Russian middle distillate seaborne exports have averaged 990,00 bbd, a strong number even in the context of record exports of 1.04 million bbd, in January 2023, as sanctions on oil product exports were coming into play.

Much of exports have listed Mediterranean countries as destinations (e.g., Greece, Turkey, Italy) before a ship-to-ship transfer enables cargoes to reach their final destinations (e.g., Brazil, North and West Africa have been top final destinations for middle distillates in 2023.)

Domestic US production recovering

Traders anticipate an increase in US crude oil output, prompted by higher oil prices. Domestic production finally recovered to the 12.9 million barrels per day (bbd) rate last seen in March 2020 pre-pandemic peak. Crude oil runs, the volume of crude oil consumed by refineries, reached a 20-month high of 16.8 million bbd.

The Energy Information Administration (EIA) forecasts domestic crude production to rise by a further 100,000 bbd by year-end, which will result in record production of 12.8 million bbd, ahead of the 12.3 million bbd record set in 2019. Next year, that output will rise by a further 400,000 bbd, which will constitute just under 20% of the 2.5 million bbd growth we expect to see across the complex in 2023. Given rising Asian demand, this raises prospects for increased US exports in 2024.

Baker Hughes rig count rising

On Friday, the Baker Hughes oil rig count rose for the first time in three months (by two rigs, to 515 total) which indications that there might be further rises in output over the coming months.

With spot oil prices in the $90-$100 range, there is a significant that the rig count could rise above 700 in 2024. For reference, the rig count is currently down by 127 from 759 rigs a year ago. 

Meanwhile, gas rigs rose by seven (121 total) despite prices diving by 40% this year, with all of the new rigs added being in Texas (which accounts for half of US gas rigs).

Production problems closing some capacity

Europe will have as much as 40% lower offline refining capacity in Q4 2023 y/y, which raises hopes of strong oil product supply for the continent as winter approaches. There is around 800,00 bbd of scheduled maintenance in the autumn, a 33% rise on Q3 according to Wood Mackenzie.

This could be significant for Europe in that it will be less reliant on imports this autumn, at a time when prices across the complex are surging. European stocks are at 20 year lows (behind 2022 and 2004).

Crack spread widens as crude prices rise

The ICE Gasoil Crack has surged by over 2%, in part due to weather-related risk to Mediterranean refinery operations. The crack spread represents the differences between crude oil and the prices of the wholesale petroleum products that derive from it, such as jet fuel, kerosene, home heating oil, and gasoline.

Analysis by Harry Altham, Energy Analyst, EMEA & Asia: harry.altham@stonex.com and Alex Hodes, Energy Analyst: alex.hodes@stonex.com

Edited by Paul Walton, Financial Writer: Paul.Walton@StoneX.com