Oil stumbled on hopes of progress of Gaza ceasefire talks

·         But Russia/Putin may soon ensure higher oil ahead of the US election (an advantage for Trump)

·         After Ukraine hit deep inside Russia with US missiles, Russia warned US playing with ‘fire’ and risk even WW-III

·         Despite ongoing Gaza war ceasefire talks, the US is also not completely not ruling out a direct Iran attack on Israel

·         Oil has also rebalanced in the last few weeks to some extent (higher demand against lower supply)

Oil surged in the last few days from a low around $71.45 to $77.50 on increasing geopolitical tensions (Gaza war and also Ukraine war), fading hopes of an imminent ceasefire (even temporary), higher demand and lower supply by Libya and the narrative of higher global demand. Before that, by mid-August, oil also stumbled from around $78.00 to $71.45 (a recent low) on the progress of the Gaza war ceasefire and the concerns of a synchronized global recession (hard landing) after ‘terrible’ US job data for July.

But subsequent soft US jobless claims data also eased the concern of an all-out recession. This along with hopes & hypes of an early Fed pivot and fading hopes of an imminent Gaza war cease-fire, increasing tensions between Israel-Hezbollah/Hamas/Iran proxies, and a flare-up of the Russia-Ukraine war helped oil to recover from the $71.45 area to $77.50. But overall, the unwinding of the Yen carried trade panic (stronger Yen amid BOJ ‘exit’), the concern of slowing China and lower demand from India undercut oil, while stronger, yet below expected summer driving demand from the US also supported the ‘black gold’ (oil).

Oil jumped almost +7% for the last few days amid fading hopes of an imminent Gaza war ceasefire, escalating fighting between Hezbollah/Hamas and Israel and also Russia-Ukraine after Ukraine struck deep inside Russia (Kursk region) with a US-made/local (?) long/medium-range missiles and claimed to have retaken some lands in Kharkiv. In exchange, Russia also responded with a barrage of deadly missiles and drones in almost half of Ukraine.

Russia also warned West/US President Biden is playing with fire and warned of even risk of WW-III after Ukraine attacked Russia's western Kursk region on Aug. 6 and has carved out a slice of territory in the biggest foreign attack on Russia since WW-II. Russia said the West was playing with fire by considering allowing Ukraine to strike deep into Russia with Western missiles and cautioned the US on Tuesday that WW-III would not be confined to Europe.

On Tuesday, Russian Foreign Minister Lavrov said:

·         We are now confirming once again that West playing with fire - and they are like small children playing with matches - is a very dangerous thing for grown-up uncles and aunts who are entrusted with nuclear weapons in one or another Western country

·         Americans unequivocally associate conversations about the Third World War as something that, God forbid, if it happens, will affect Europe exclusively

·         Russia is clarifying its nuclear doctrine (only to use it as the last option when the very existence of the state is put under threat

Ukrainian President Zelensky said earlier in August the assault on Russia's Kursk region showed that Kremlin threats of retaliation were a bluff. Zelensky said Ukraine, because of the restrictions imposed by NATO allies, could not use the weapons at its disposal to hit some Russian military targets. He urged allies to be ‘bolder’ in their decisions about how to help Kyiv in the war.

Russia has said that Western weaponry, including British tanks and U.S. rocket/missile systems, have been used by Ukraine in Kursk, while Ukraine has also confirmed using U.S. HIMARS missiles to take out bridges in Kursk. White House said it was not informed about Ukraine's plans ahead of the surprise incursion into Kursk and it did not take any part in the operation. The Kremlin also said it did not believe Western assertions that it had nothing to do with the Kursk attack; the involvement of the US was an obvious fact. As per the NYT report, the US and Britain provided Ukraine with satellite imagery and other information (exact coordinates of the target building) about the Kursk region in the days before the Ukrainian attack.

Although China, India, Brazil, Indonesia, and also South Africa are trying for a Russia-Ukraine peace plan, it seems that there are no hopes for any imminent ceasefire and oil is getting a boost ahead of the Nov’24 US election, negative for incumbent Biden/Democrat Government. Also, it seems that despite intense efforts, the Biden admin is not able to seal a permanent or even temporary cease-fire plan due to the respective domestic political compulsion of all concerned stakeholders.

Moreover, Putin may want ‘friendlier’ Trump to be the next US President instead of Harris, although due to limited influential power in domestic politics, both Democrat and Republican US Presidents are often involved in various wars all over the world, thousands of miles away from the US soil either directly or indirectly. The US is the biggest exporter of military arms and also oil followed by Russia and both countries may be the biggest beneficiaries of geopolitical tensions/war.

Democratic Presidents usually get involved in wars related to defending democracy, humanitarian interventions, and Cold War geopolitics (e.g., Korea, Vietnam, Kosovo, Libya, Russia-Ukraine, and Gaza war). Their involvement often focuses on global leadership and multilateral approaches (e.g., NATO). On the other side, US Republican Presidents have been associated with wars focused on protecting U.S. security interests, responding to direct threats (e.g., Gulf War, Afghanistan, Iraq), and sometimes employing unilateral action (e.g., Iraq War). The emphasis has been on strong military responses to perceived dangers.

In recent memory, US President Obama was instrumental in a NATO-led intervention in Libya to support rebels against Gaddafi during the Arab Spring in 2011 (after 2007-10 GFC). After the Obama admin, the Trump admin was not involved in any large-scale war directly or indirectly despite the war of words with North Korea’s Kim. Moreover, Trump was instrumental in withdrawing US troops from Afghanistan and Iraq/Middle East.

But after that, the Biden admin was instrumental and also played an active role in supporting Ukraine against Russia and Israel’s Gaza war (by supporting financially and militarily). If Trump wins this time, we may see a less war-savvy US geopolitics stance. Although war war-savvy stance is beneficial for the military and even the oil industry and also acts as some type of indirect fiscal stimulus, the resultant higher fiscal deficit, public debt and devaluation of LCU (local currency unit-USD) is positive for inflation and Gold.

Looking ahead, Russia/Putin/OPEC+ countries may ensure higher oil in Sep-Dec’24; i.e. just ahead of the US election. The Russia-Ukraine war may be intensified for a serious geopolitical event and Iran may also attack Israel directly/indirectly (through Hezbollah).

Although the Biden admin is trying intensively for an imminent Gaza war ceasefire ahead of the US Presidential election, on Tuesday (27th August), the US National Security Council spokesman Kirby said:

·         The United States remains committed to defending Israel in the event of an Iranian attack

·         It is tough to predict the chances of an attack, but the White House takes Iranian rhetoric seriously

·         We believe that they are still postured and poised to launch an attack should they want to do that, which is why we have that enhanced force posture in the region

·         Our messaging to Iran is consistent, has been, and will stay consistent

·         One, don’t do it. There’s no reason to escalate this. There’s no reason to potentially start some sort of all-out regional war. And number two, we are going to be prepared to defend Israel if it comes to that

Meanwhile, the Biden admin is now arranging the next Gaza ceasefire meeting at Doha-Qatar. On Tuesday, Biden’s top Middle East adviser held talks in Doha with senior Qatari leaders on the ongoing efforts to complete a ceasefire and hostage deal between Israel and Hamas. As a mediator, Q2atar is also bridging with Iran and Hamas closely.

On 14/08/24, the IEA said in its August MOR (Monthly Oil Report):

 “Global oil demand increased by 870 kb/d in 2Q24, with a contraction in China limiting gains. Demand is set to rise by less than 1 mb/d in both 2024 and 2025. This is largely unchanged from last month’s Report and far slower than last year’s 2.1 mb/d growth as comparatively lackluster macroeconomic drivers come to the fore.

World supply rose 230 kb/d to 103.4 mb/d in July as a substantial OPEC+ increase more than offset losses from non-OPEC+. Annual gains accelerate from 730 kb/d in 2024 to 1.9 mb/d in 2025. Non-OPEC+ production increases by 1.5 mb/d this year and next, while OPEC+ may fall by 760 kb/d in 2024 but rise by 400 kb/d in 2025 if voluntary cuts stay in place.

Global refinery throughputs are forecast to increase by 840 kb/d to 83.3 mb/d in 2024; and by 600 kb/d to 83.9 mb/d next year. Margin weakness continues to weigh on processing rates, with Chinese runs now expected to decline y-o-y. Margins fell further in July in Europe, but rose in Singapore and on the US Gulf Coast, led by stronger naphtha and gasoline cracks.

Global observed oil inventories fell by 26.2 mb in June, following four months of builds totaling 157.5 mb. OECD onshore stocks declined by 19.5 mb but were mostly offset by a 17.5 mb increase in non-OECD countries. Oil on water declined for a third consecutive month, by 24.2 mb. OECD Industry inventories were down by 21 mb, largely in line with the seasonal norm.

Brent crude futures tumbled by $6/bbl during July, as a string of weak macroeconomic data prompted a broad risk-off sentiment across financial markets, outweighing escalating hostilities in the Middle East. Front-month time spreads remained resilient in the face of falling flat prices, reflecting a tight Atlantic Basin market. At the time of writing, Brent was trading at around $80/bbl.

Market gymnastics

Oil markets exhibited Olympic levels of volatility over recent weeks. Benchmark crude oil prices tumbled sharply lower in July and early August as unexpected economic data threw the market off balance. Questions over the health of the global economy re-emerged as Japan increased interest rates sparking a reversal in yen carry trades, China’s outlook deteriorated and US hiring slowed in July. However persistent geopolitical tensions in the Middle East and some relatively positive macroeconomic data backstopped weakness in oil futures, with prices rebounding higher in the second week of August.

Moreover, OPEC+ cuts are also tightening physical markets, lifting North Sea Dated to a $2/bbl premium against the front-month ICE contract. At the time of writing, ICE Brent futures traded at around $80/bbl, down by more than $6/bbl since the start of July.

Our outlook for global oil demand is largely unchanged from last month’s Report, with growth projected at slightly less than 1 mb/d in both 2024 and 2025. However, a meaningful shift in drivers is becoming apparent. In June, Chinese oil demand contracted for a third consecutive month, driven by a slump in industrial inputs, including for the petrochemical sector. Preliminary trade data point to further weakness in July, as crude oil imports sank to their lowest level since the stringent lockdowns of September 2022.

By contrast, demand in advanced economies, especially for US gasoline, has shown signs of strength in recent months. The US economy, where one-third of global gasoline is consumed, has outperformed peers, with a resilient service sector buttressing miles driven. As a result, OECD oil consumption flipped from a 300 kb/d annual contraction in 1Q24 to a growth of 190 kb/d in the second quarter.

Despite the marked slowdown in Chinese oil demand growth, OPEC+ has yet to call time on its plan to gradually unwind voluntary production cuts starting in the fourth quarter. Its Joint Ministerial Monitoring Committee (JMMC) reiterated on 1 August, however, that the group could pause or reverse its decision depending on prevailing market conditions.

Our current balances suggest that even if those cuts remain in place, global inventories could build by an average of 860 kb/d next year as non-OPEC+ supply increases by around 1.5 mb/d in 2024 and again in 2025 more than covering expected demand growth. The Americas quartet of the United States; Guyana, Canada and Brazil account for three-quarters, or roughly 1.1 mb/d, of non-OPEC+ supply gains in each of the two years.

For now, supply is struggling to keep pace with peak summer demand, tipping the market into a deficit. As a result, global inventories have taken a hit. After four months of gains, June saw oil inventories fall by 26.2 mb. Crude oil stocks dropped by 40.9 mb, even as China built substantially. Meanwhile, oil products rose by 14.8 mb, supported by large builds in US LPG.

Preliminary July data suggest this trend continued, with total stocks declining once again as crude inventories lost further ground while oil products made gains. This dynamic is squeezing refinery margins, potentially setting the stage for an upset and shift in refinery activity in the coming months. Competition in the oil markets will continue even after the Olympic and Paralympic”

 

Overall, if we take an average of OPEC+IEA+EIA data, there was some glut around +0.26 mbpd (more supplies than demand) in 2023, whereas there may be some rebalancing (lower supply than demand) of -0.21 mbpd projected in 2024.

Conclusion:

Overall, global production/supply is now showing some signs of rebalancing/tightness. OPEC+ production cut narrative is now sounding more like central bank jawboning rather than real action/cut as apart from Saudi Arabia, none of the OPEC+ producers have meaningful real effective spare capacity to influence the global supply. Also, Saudi Arabia has limits as oil revenue is the main source of national income. The same is almost true for other big OPEC+ producers. Moreover, OPEC+ is steadily losing market share as N-OPEC+ led by the US is increasing their production levels to nullify the OPEC+ cartel in this war of sheikhs and shale. Also, higher oil production from Brazil, Canada, Norway, and Guyana is undercutting oil despite lingering geopolitical tensions.

Market impact:

On Tuesday, Oil slumped to almost $75.35, stumbled almost --2.5 %, snapping a day rally on hopes of progress of Gaza war ceasefire talks. This follows after a more than 7% rally over the previous three sessions amid Gaza and Ukraine war tensions and concerns about a potential shutdown of Libyan oil fields. Libya's announced a total closure of its oil fields amid political conflict and ongoing regional tensions. This halt in production and exports from Libya, a significant oil producer (around 1.15 mbpd), has added to fears of tightening global supply. Over the weekend, Israel and Hezbollah exchanged missiles, raising concerns about potential disruptions in the region, although ceasefire talks regarding the conflict between Israel and Hamas are ongoing; will now take place at Doha.

Weekly-Technical trading levels: oil

Technically Oil (75.75) now has to sustain over 74.50-75.00 for any further rally to 77.75-79.00/80.50-82.00/85.00-88.00-90.00/91.00-95.00; otherwise sustaining below 74.00, oil may further fall to 73.00/72.00-71.00/70.00 and 68.00 in the coming days.