This Is About As Bearish As Oil Has Been Since the 2008 Financial Crisis

Oil prices are little changed in Wednesday's intraday sessions after they tumbled more than 4% on Tuesday to a near two-week low on easing Iranian supply disruption fears. According to a report by the Washington Post, Israeli Prime Minister Netanyahu told the Biden administration that Israel is willing to strike Iran’s military infrastructure rather than oil or nuclear facilities, and that Israel would take U.S. opinion into consideration. Brent crude for December delivery was flat to trade at $74.22/barrel at 13.05 pm ET while WTI crude for November delivery declined 0.31% to $70.36/barrel.

The pressure on oil prices has been compounded by other developments after the International Energy Agency lowered its 2024 oil demand growth forecast for the third month in a row to 862K bbl/day, down from its prior view of 903K bbl/day. According to the IEA, global oil demand increased by 680K bbl/day in Q3, its slowest growth clip since Q4 2022 when China was in full lockdown.

To complicate matters, Chinese demand contracted by 500K bbl/day Y/Y in August, more than double the average decline of 190K bbl/day since April. On a more positive note, the IEA has revised its 2025 global oil demand growth estimate to 998K bbl/day up from 954K bbl/day previously.

As commodity experts Standard Chartered have observed, oil prices in October-to-date have been as erratic as its September gyrations. The Brent forward curve remains very flat, with an almost parallel downwards shift over the past week. According to StanChart, the prevailing tone of market sentiment, particularly among the more speculative traders, remains overwhelmingly bearish, on par with that in late 2008 at the start of the Global Financial Crisis.

StanChart notes that the main themes currently dominating oil markets are expectations of macroeconomic hard landings, extreme oil demand weakness, and persistent fears of oversupplied oil markets in 2025. However, the commodity experts have argued that the oversupply concerns may be overblown given the ongoing supply-side opaqueness.

StanChart points out that whereas the market has been focusing more on the considerable gap between IEA and OPEC Secretariat estimates of demand growth, relatively little attention has been given to even larger differences between IEA and U.S .Energy Information Administration (EIA) estimates of OPEC+ (also known as Declaration of Cooperation, DoC) oil output. The IEA sees OPEC crude oil output 700kb/d higher, DoC crude oil output 967kb/d higher and total DoC liquids output 1.323mb/d higher. The OPEC Secretariat figures--the average of seven secondary-source assessments (energy consultancies, EIA and media)--are closer to the EIA rather than the IEA estimates.

StanChart points out that the difference between the IEA and the EIA DoC supply estimates is roughly commensurate with the IEA’s inferred 2025 surplus. That’s an important point to bear in mind considering that the IEA’s prediction of 2025 oversupply is largely to blame for the current ultra-bearish market sentiment, meaning that the 2025 surplus that has led to lower 2024 prices could primarily be made up of ghost, rather than real, barrels. StanChart says that the considerable differences in supply/demand estimates by the leading energy agencies also matter in terms of OPEC producer policy. For instance, according to the EIA, the UAE produced just 18kb/d above target in September, while the IEA sees the overrun as a substantial 348 kb/d.

On a more bullish note, StanChart has worked out that the IEA model implies a global stock draw of 370 kb/d in Q3-2024, even with up to 1.3mb/d of [possible] ghost barrels. Further, StanChart’s model shows a small H1-2025 supply deficit of 0.2 mb/d, even if voluntary output cuts are scaled back, but only if Russia, Iraq and Kazakhstan compensate for past overproduction. Back in July, the three OPEC+ members submitted their compensation plans to the OPEC Secretariat for overproduced crude volumes for the first six months of 2024. According to OPEC, the entire over-produced volumes will be fully compensated for over the next 15 months through September 2025, with Russia ‘paying back’ a cumulative 480 kb/d, Iraq 1,184 kb/d and Kazakhstan 620 kb/d.

Regarding geopolitical concerns, StanChart says that traders have adopted a largely short-term approach by reacting to hourly news feeds but are not pricing in the potential for longer-term changes in Iran’s foreign relations, or even Iranian reactions to any further attacks on it. StanChart has predicted that oil prices will drift higher when the dust of the short-term headlines eventually clears.

By Alex Kimani for Oilprice.com