Crude prices notched their biggest one-day declines in over two years on Monday, Michael Brown, a Senior Research Strategist at Pepperstone, said in a market analysis sent to Rigzone on Tuesday.
“The geopolitical situation in the Middle East appears to have cooled substantially, with Israel’s weekend retaliatory strikes on Iran having centered on military infrastructure, and avoided any oil, energy, or nuclear installations,” Brown said in the analysis.
“In short, it seems the strikes were more of a ‘face saving’ response, akin to that seen in April, as opposed to being designed to spark a further escalation in tensions,” he added.
Consequently, a significant degree of geopolitical risk premium was priced out of crude, Brown stated in the analysis.
“Yesterday saw front WTI notch its worst day in over two years, while front Brent fell six percent in its biggest one-day decline since August 2022,” he said.
“With the aforementioned risk premium having been priced out, the floor that had been supporting prices now seems to have been removed which, coupled with the dour demand outlook, likely gives crude bears the upper hand in the short-term,” Brown warned.
In a market analysis sent to Rigzone on Monday, George Pavel, a General Manager at Capex.com Middle East, highlighted that “crude oil futures continue to decline as recent developments in the Middle East have shifted the market’s risk perception”.
“Following the limited confrontations in the region over the weekend, markets see reduced escalation risks. In addition, supply disruption fears subsided as oil infrastructure was not targeted,” he added.
“While caution could remain present on the market due to the potential for renewed hostilities, the immediate outlook appears more stable. Easing geopolitical concerns could lead to further downward pressure on global crude prices,” he continued.
Pavel also warned in the analysis that the demand outlook for oil, particularly in Asia, remains subdued.
“October import figures are expected to decline compared to previous months, with a notable decrease in Chinese crude imports affecting the overall demand outlook,” he said.
“Although there is some hope that China’s economic stimulus measures will revive its economy, the focus on consumer spending and electric vehicles may not significantly increase crude oil consumption,” he noted.
“Weak demand could further push global crude prices down, especially if OPEC+ follows through with its plans to raise production,” Pavel added.
In another market comment sent to Rigzone on Monday, Samer Hasn, a Senior Market Analyst at XS.com, highlighted that “previous talk about the possibility of targeting Iran’s critical facilities, and the potential disruption to crude supplies from Iran or from regional countries as a result of an escalation in the war, had sparked fears in the markets and sent prices higher for some time”.
“But that was about this round of escalation. Now, we see talk about the features of the next round of escalation, which will take place after the end of the U.S. presidential elections – which are believed to have influenced the decision about the nature of the attack to prevent oil prices from rising simultaneously,” he added.
In a Stratas Advisors report sent to Rigzone by the Stratas team on Monday, the company said it expected that when the Israeli response to Iran’s attack occurred, it would be measured.
“The response by Israel that occurred over the weekend was limited in nature with the attack focused on Iranian military targets, including anti-aircraft systems and missile production facilities,” Stratas stated in the report.
“In the aftermath of the attack, Iran’s Foreign Minister sent a letter to the UN Secretary-General stating that Iran had the inherent right to respond at the appropriate time. Iran’s supreme leader, Ali Khamenei, however, in his address about the attack, did not mention any future retaliation by Iran,” it added.
Stratas noted in the report that the limited attack, and the restraint shown by Iran, were as Stratas has been expecting.
“It has been our view that while the U.S. would support Israel against attacks, the current U.S. administration would not support Israel in a major offensive action against Iran, including attacks on Iranian nuclear facilities as well as any attack on Iran’s oil and gas infrastructure,” it said.
“Additionally, it has been our view that Iran will continue to show restraint in responding to Israel, in part, because Iran is not interested in a major conflict with the Israeli military that will be supported by the U.S. and allies,” it added in the report.
Looking at the upcoming week, Stratas said, “with the ongoing stream of disappointing economic news about China, and the reduction in the geopolitical concerns about the Middle East (at least for the short term), we expect that there will be downward pressure on oil prices”.
The report revealed that Stratas is expecting the price of Brent crude will test $70.00 this week.
In a research note sent to Rigzone by the JPM Commodities Research team on Monday, J.P. Morgan analysts highlighted that, “with geopolitical concerns temporarily set aside, attention is once again shifting back to market fundamentals”.
“At the beginning of summer, we expected global demand for oil liquids to surpass supply in the third quarter by 1.0 million barrels per day, with a sizeable 1.9 million barrel per day deficit in August, followed by a 0.3 million barrel per day deficit in September,” they added.
The analysts stated in the note that their forecasts were validated, “as observable inventories of oil liquids fell by 117 million barrels globally during the summer quarter, averaging about 1.3 million barrels per day, with an impressive decline of 2.2 million barrels per day in August”.
They added, however, that, “with the incorporation of new data, our published balances have gradually adjusted, indicating a much looser market”.
“They now show only a 500,000 barrel per day deficit in the third quarter, a 900,000 barrel per day deficit in August, and a 300,000 barrel per day surplus in September,” the analysts continued.
The J.P. Morgan analysts stated in the research note that this contradiction might be explained by assuming that their projected supply is too high or that demand is too low.
“Alternatively, it could suggest that global observable inventories are being underreported,” the analysts added.
In a separate research note sent to Rigzone by the JPM Commodities Research team on Monday, J.P. Morgan analysts said the estimated value of open interest across energy markets increased by $29 billion week on week, or five percent week on week, to around $628 billion.
“The increase was primarily driven by higher crude oil prices over last week, while contract-based inflows (across all trader types) totaled $2.4 billion week on week, primarily into crude oil and natural gas markets,” the analysts said in that note.
“Oil prices sold off geopolitical risk premium early in the trading week, with Brent down near six percent DOD, as Israel’s retaliatory strike against Iran over the weekend bypassed oil and nuclear facilities, leaving energy supplies unaffected,” they added.
“This supports our oil strategist’s view that sustaining bullish price momentum in oil is a high maintenance task – without additional catalysts, the ‘war’ and ‘stimulus’ premiums are prone to fading,” they continued.
To contact the author, email andreas.exarheas@rigzone.com