Learn all about the factors influencing oil supply and demand in Q4, especially the policy of OPEC and the release of Texas oil reserves.
By October 21st this year, WTI (West Texas Intermediate) oil was holding at $85 a barrel after an overall positive week, but prices had been restricted within a small range for the previous month. There were two forces working on oil prices with opposite influences, namely: “The bullish side of tighter supplies, especially diesel, against rising interest rates and a possible recession”, in the words of Dennis Kissler of Bok Financial Securities. Reasons for limited supply included the stance of OPEC on holding back production and the European Union’s sanctions on Russian oil. As to demand, prospects were not rock solid due to China’s zero-tolerance attitude to the pandemic, which was bearish for prices. Taking the bigger picture into account, the general trend was clear: Oil had lost one-third of its value since the start of June. Join us as we delve into the factors behind the oil price scenes lately and see where they may be headed next. Read before you invest now in oil prices with iFOREX in the form of CFDs.
August – September
In the second week of August, the International Energy Agency (IEA) saw oil demand rising, especially in Europe and the Middle East, due to the need for air-conditioning in the hot weather, as well as an expected industry switch from gas to oil, coming off the back of elevated gas prices. Natural gas prices surged this year because Russia cut back flows in retaliation for European sanctions to its conflict with Ukraine, and the response of OPEC in September to President Biden’s personal request in Saudi Arabia for a supply boost was the addition of a mere 100,000 barrels a day.
Also in September, the IEA said their prediction of demand growth was premised upon China loosening up its Covid strictness so its economy could gain traction again. In fact, demand would slump in Q4 2022, admitted the IEA. “We still see demand growth, mainly in emerging markets”, remarked economist Norbert Rucker, “but we also see stagnant demand in the Western World and China”. According to Rucker, the chief reason for the big dip in oil prices since June was the fact that supply was overwhelming demand. This trend had started setting in after a brief surge in oil prices, all the way up to $140 a barrel in March, after Russia sent its troops into Ukraine.
By Mid-September, the USA had experienced two quarters of negative growth, which smacked of recession, ushering in a bearish period for oil prices. Also, some oil refineries in China were being repaired over the summertime, which cut down on the nation’s imports and so pushed prices down.
In mid-October, reports indicated the USA would keep on selling oil from its crude reserves, which was, once again, bearish for prices. New Mexico and Texas oil would get pumped at the rate of an extra 500,000 barrels a day for the rest of the month.
For context, let’s go back to the end of September, when WTI prices rallied 2.3% on the 27th of the month when traders heard Russia would try persuading OPEC to hold back production. Traders also remembered that new Russian fuel sanctions were soon to kick in, which would further restrict supply. Robert Yawger of Mizuho Securities, however, saw these bullish factors as of “secondary importance”. Rather, “The market is still going to have a rough time trading strongly to the upside unless we get a break in the rally in the dollar”. A strong USD often means pressure on oil prices because commodities like oil are priced in the USD currency. Analysts believed the downward price trajectory would convince OPEC to put the brakes on supply, and JPMorgan openly asked them to do so. The Fed, for its part, gave signals soon before October that they were still in hiking mood, which kept prices grounded.
A common scene throughout the last three decades has been that of OPEC complaining about speculators driving oil price surges without fundamental basis. Saudi Arabia’s Energy Minister, however, blamed the same category of people for the dip in prices near the end of August. In other words, he claimed that the low count of retail oil buyers was giving a false impression that supply was overcoming demand. The solution, said the minister, was to cut back on production to allow the truly tight market to reveal itself. His logic escaped Bloomberg’s Julian Lee, who admitted, “I fail to see how cutting output in a supposedly tight market can possibly be in the interest of stability”. Rather, Lee concluded, “Simply put, the Saudis want higher oil prices” but are laying the blame on speculators.
If you’re intending to invest now in oil prices with iFOREX as CFDs, keep a close eye on the conflict between Saudi interests in this regard and the electoral pressures facing President Biden. It’s also a good idea to watch out for any softening of China’s pandemic policy, which could up demand from the mega-economy. Despite the strict official stance on the issue, there seemed to be a possibility in late October that quarantine rules for arriving travelers could be relaxed.