Energy Brief for Oct 2.23
by market analysts Stephen Platt and Mike McElroy
WTI continued to trade in a choppy fashion, with early strength linked to perceptions of tightness and avoidance of a government shutdown giving way to long liquidation as the November contract settled lower by 1.97 at 88.82. Expansion in output by some OPEC members in September along with downward revisions to Chinese economic growth expectations in 2024 by the IMF raised questions over demand and triggered selling.
Reuters reported OPEC oil output rose for the second month despite ongoing cuts by Saudi Arabia and other members. The cartel pumped 27.73 mb/d in September, an increase of 120 tb/d from August. The gain was led by a sizable boost in exports traced to Nigeria, following a reduction in domestic fuel subsidies. Output from the 10 OPEC members that are subject to the supply cut agreement rose by 80 tb/d with Saudi Arabia and other Gulf Coast producers maintaining strong compliance. Iran, which is exempt from the current pact, saw production rise to 3.15 mb, the highest since 2018. OPEC is still undershooting the targeted cuts by 700 tb/d due to Nigeria and Angola lacking the capacity to pump at their agreed level.
Demand concerns grew for Asia, the world’s top importing region, which saw September crude oil imports decline for the second consecutive month to 24.95 mb/d from 25.22 in August and against a high for 2023 of 27.92 in July. The IMF also reduced their 2024 growth forecast for China to 4.4 percent from 5.1in 2023 and 4.8 percent estimated in April.
With differentials and the backwardation still wide for WTI and seasonal maintenance at refineries in October, potential for a reduction in crude export volume along with lower crude throughput should help ease availability. In addition, rising production in the US despite lower rig counts has been apparent. Economic uncertainty remains in the background with high interest rates weighing on the domestic economy. Doubts over the Chinese economy also persist. With Golden Week in China now starting, travel trends and spending in early October will be watched closely for their impact on demand. While no further moves are expected at the OPEC Price Monitoring Committee Meeting on Wednesday, some talk has surfaced that the Saudi’s might make adjustments downward in their voluntary cuts as we enter 2024. Nevertheless, low inventories at Cushing remain worrisome, prompting concerns over a short squeeze ahead of the November crude expiration on October 20th which should limit downside movement. Support should emerge at current levels down to 88.00, with a move below there setting up the potential for a test of 86. Resistance near 92.50 likely holds until a more substantial recovery in Cushing crude stocks is realized.
The DOE report will be watched closely with crude inventories expected lower by .1 mb, distillate of 1.2 and gasoline down .2. Refinery utilization is expected to drop .2 to 89.1 percent.
Strength seen late last week ran out of momentum early in today’s session as the November contract slipped 8.9 cents to settle at 2.840. The upside bias had been unsupported by any obvious fundamental driver, making the retreat unsurprising after the failure to violate the 3 dollar level on Friday. Weather remains uninspiring as we kick off October and trade anxiously awaits signs of cooling trends. Production saw a substantial drop of more than 1 bcf over the last two days, but it was unable to stir any buying interest as there tend to be inconsistencies at the beginning of the month. With the tight range that we have been mired in recently, today’s selloff quickly brought the market to within striking distance of the contract low at 2.796. There will be decent support to work through in the 2.80-2.83 range in order for a new low to be reached. Initial resistance now rests at 2.89 with 3 dollar level the obvious target beyond there.
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