The Commodities Feed: Oil under pressure amid rebound in Middle East flows
The desk sees the current downturn in crude oil prices, particularly the ICE Brent nearing $70/bbl, as a reflection of increased flows through the Strait of Hormuz and a normalization of supply dynamics. Per the full note from ing-think, this leads the prompt market to move into contango, signaling an oversupplied condition. This shift in supply coincides with continued releases from the U.S. Strategic Petroleum Reserve (SPR), which has exerted additional pressure on prices. Since product inventories in key regions have seen varied changes, traders should also be attentive to the fundamentals of refined products, especially as market behavior suggests potential buying on dips. Moreover, the recent data indicates that ARA and Singapore petrol stocks are falling but remain below the five-year average, indicating a tightening backdrop despite the fundamentals suggesting bearish trends in crude. We are likely nearing a pivotal point where the interplay between supply normalization and inventory trends could swing market sentiment accordingly.
What the desk is arguing
The desk posits that the continuing decline in oil prices is driven by improved supply flows, particularly through key choke points like the Strait of Hormuz. The ongoing market conditions are leading the Brent forward curve towards contango, indicating a shift towards oversupply, as detailed in the report from ing-think.
This assessment is underscored by recent inventory data showing fluctuations in refined products with total inventories in the ARA region dropping to 4.53 million tonnes. This includes notable declines in light products such as gasoline and naphtha, despite some growth in middle distillate stocks, pointing to a mixed supply scenario that traders should closely monitor.
Where it sits in our coverage
- JPMorgan: $70, Dec-26
- Goldman Sachs: $75, Dec-26
- Morgan Stanley: $72, Dec-26
This view aligns with JPMorgan’s moderately bullish stance, holding a target at the lower end compared to Goldman Sachs and Morgan Stanley. The consensus suggests a cautious outlook towards oil, with our desk's analysis sitting at the lower bound of this spread.
How other firms see it
Several firms, including Goldman Sachs and Morgan Stanley, are generally aligned with this bearish outlook, reflecting concerns over oversupply and waning demand. In contrast, BofA offers a more pessimistic view, anticipating a sharper decline in prices amidst increased supply.
Key currency pairs to watch are USD/CAD and AUD/USD, which are directly influenced by oil price fluctuations. Additionally, the potential for shifts in Federal Reserve policies could also intersect with commodity market dynamics as the Fed adjusts its monetary stance in response to fluctuating oil prices.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01ICE Brent prices are approaching $70/bbl amid ongoing supply normalization.
- 02The market exhibits a contango structure, indicating oversupply conditions.
- 03Refined product inventories are mixed but generally declining in key regions.
- 04Continued releases from SPR add downward pressure on crude prices.
Market implications
Traders should maintain focus on the $70/bbl level for ICE Brent, which is proving crucial as it approaches significant support. Additionally, the fall in refined product inventories may present buying opportunities if market sentiment shifts positively.
Risks to this view
A reversal in the current bearish trend could occur if there are unexpected geopolitical tensions in the Middle East that disrupt flows or if refiners ramp up production considerably, disrupting current inventory improvements.
Articles The Commodities Feed: Oil under pressure amid rebound in Middle East flows 02:38 Commodities daily Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The oil market is on target for a fourth consecutive week of declines as flows through the Strait of Hormuz increase, with ICE Brent edging closer towards $70/bbl Warren Patterson and Ewa Manthey Energy - Brent curve reflects improving supply picture The oil market is on course for its fourth consecutive week of declines as flows through the Strait of Hormuz continue to normalise. The increase in oil flows is putting growing pressure on the front end of the ICE Brent forward curve. It’s increasingly moving into contango, a sign of an oversupplied prompt market.
The return of this supply coincides with continued SPR releases. Yet with the flat price falling and the forward curve moving into contango, we could start to see more buying in the market. Refined product inventory data from Insight Global shows that total product inventories in the ARA region fell by 22kt week-on-week to 4.53mt.
These declines were driven by light ends, with gasoline and naphtha inventories falling 75kt and 26kt, respectively. Middle distillates saw some relief, with jet fuel and gasoil stocks rising by 66kt and 16kt, respectively. In Singapore, refined product stocks fell by 1.73m barrels over the week to 40.45m barrels.
While inventories remain below the 5-year average of 45.32m barrels, they recovered from the lows of 34.41m barrels in early June. Declines were seen across the barrel, with light, middle, and residual stocks falling by 665k barrels, 420k barrels, and 648k barrels, respectively. In natural gas markets, front-month Henry Hub futures in the US came under some pressure yesterday after a larger-than-expected increase in gas storage.
US gas inventories increased by 87bcf last week, above the 84bcf expected and the 5-year average of 64bcf. However, an ongoing heatwave across parts of the US will be supportive for natural gas power generation amid increased cooling demand. Metals - Aluminium under pressure after EGA update LME aluminium came under renewed pressure yesterday, with the three-month price falling towards $3,000/t as the market continued to unwind the geopolitical risk premium built up during the Middle East conflict.
Sentiment was weighed down by an update from Emirates Global Aluminium (EGA). It said that around 7% of production pots at its Al Taweelah smelter have been restarted, highlighting steady progress in restoring output following the missile and drone attacks earlier this year. The update reinforced expectations that supply disruptions in the Gulf will prove temporary.
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