“Consumption of crude and oil products has not matched expectations in most places in the world which matter,” said Georgi Slavov, global head of fundamental research at London brokers Marex. “Meanwhile, there is still a consistent accumulation of supply along the entire supply chain and the result is this price weakness we’re seeing.”
Central banks, notably the US Federal Reserve, this week doubled down on convictions that raising interest rates is needed to cool rapid inflation, adding headwinds to economic growth and oil demand.
Traders are nevertheless tracking an array of supply-related issues that have the potential to boost prices. While there has been significant unrest in both Libya and Iraq in recent days, oil output in both OPEC members appears to be unaffected so far. Separately, talks to revive an Iranian nuclear deal that may unlock greater crude exports have dragged on, and Russian output has been maintained at levels higher than prior expectations.
“Russia has been able to find buyers in Asia, China and India in particular and in turn more oil from Saudi Arabia and other producers was left for western countries – that’s also bolstered the supply side,” Carsten Fritsch, an analyst at Comerzbank said by phone.
Oil’s decline in August marks the latest chapter in a tumultuous year, with prices driven higher in the first half by Russia’s invasion of Ukraine, then undermined as central banks shifted tack and Moscow managed to keep most exports flowing. Crude’s recent slump prompted OPEC+ heavyweight Saudi Arabia to float the idea the alliance could cut output, although Russian media reported the alliance wasn’t discussing such a move at present.
The main theme “is pessimistic macro-economic expectations, coupled with tight supply from low inventories,” said Zhou Mi, an analyst at Chaos Research Institute in Shanghai, which is affiliated with Chaos Ternary Futures Co.
Data on Wednesday highlighted the challenges facing China. Factory activity contracted in August for a second month, with the economy taking a hit from Covid-19 outbreaks, a property market crisis and power shortages.
Prices: WTI for October delivery was 2.7% lower at $89.18 a barrel on the New York Mercantile Exchange at 10:36 am in London. Brent for October settlement, which expires Wednesday, dropped 3.4% to $95.89 a barrel on the ICE Futures Europe exchange. Contract has lost about 13% in August. November Brent fell 2.6% Commodities including crude oil have also faced a headwind this month from gains in the dollar, which makes raw materials more expensive for holders outside the US. The Bloomberg Dollar Spot Index has climbed by more than 2% in August as the Federal Reserve commits to higher interest rates, with the gauge approaching a record high that was hit in July.
Key time spreads suggest that tightness in the market has eased. WTI’s prompt spread — the difference between the two nearest contracts — was 41 cents a barrel in backwardation, compared with $1.87 a month ago.
An insight into market conditions in the US will come later Wednesday when the Energy Information Administration issues its weekly analysis of supply and demand. On Tuesday, the American Petroleum Institute reported a modest build in nationwide oil holdings, although there was a drop at the key storage hub in Cushing, Oklahoma, according to people familiar with the figures.