Geopolitical premium “water squeeze”, international crude oil will face a new test

On the 28th, international oil prices plummeted significantly, following Israel's weekend retaliatory strikes against Iran that did not involve oil and nuclear facilities, thereby easing tensions in the Middle East. As new initiatives for a ceasefire in Gaza are back on the agenda, the geopolitical premium has further diminished.

Analysts believe that if the situation in the Middle East becomes more stable, oil prices will be dominated by economic fundamentals again, and potential share competition on the supply side may pose new challenges to the market.

Geopolitical premium easing:

The Israeli military conducted precise strikes on Iranian military targets over the weekend in response to recent Iranian attacks on Israel.

It is worth noting that Iran's oil production facilities were left unscathed, which brought a sigh of relief to the market. Industry statistics show that Iran's oil production rose to a six-year high of 3.7 million barrels per day in August, with exports reaching 1.8 million barrels per day. At the same time, Tehran's relatively mild reaction to the attacks increased hopes of avoiding further escalation of the situation. On the 28th, international oil prices plummeted, with WTI crude oil plummeting by 6.13%, breaking below the $68 mark for the first time in nearly a month during trading. Brent crude oil fell by 6.09%, marking the largest drop since July 2022.

Advertisement

In the derivatives market, bulls have already begun to retreat in advance. The latest data from the U.S. Commodity Futures Trading Commission (CFTC) shows that in the week of October 22nd, speculators' net long positions in NYMEX WTI crude oil decreased by more than 15,000 contracts, to 113,773 contracts, hitting a six-week low.

Tamas Varga, a senior market analyst at crude oil broker PVM Oil Associates, said in an interview with Yicai that prior to this, the prospect of a ceasefire between Israel and Hamas in Gaza was under scrutiny. The outside world had been waiting for Israel's response to Iran, and the Israeli side ultimately completed the attack by avoiding attacks on nuclear power plants or energy facilities, greatly limiting the risk of regional situation escalation.

Varga believes that the market trend is the process of "squeezing out" the geopolitical premium. Previously, there had been concerns that Israel would attack Iran's oil industry stronghold on Hargeisa Island in the northeastern Persian Gulf, leading to the disruption of traffic in the Strait of Hormuz, a global energy artery.

Some analysts are still assessing the possibility of Iran retaliating in the coming weeks. Phil Flynn, a senior market analyst at futures company Price Futures Group, warned that concerns about Persian Gulf oil are not over, "The direct threat of supply disruption has been shelved for now. But from a broader perspective, if you think this attack will end hostile actions, I don't think so... Although Iran has stated that they will not respond, I believe Iran will try to regroup their proxies and respond in some way."

Fundamental test to come:If geopolitical tensions gradually subside, crude oil prices will return to being guided by fundamentals.

First Financial Daily reporters have summarized and found that both OPEC and the International Energy Agency (IEA) have consecutively lowered their expectations for energy demand growth this year for the third time in their monthly market reports. OPEC stated that global oil demand will increase by 1.93 million barrels per day (bpd) in 2024, lower than the 2.03 million bpd in August. For the main consumer, China, the organization expects government stimulus measures to support demand in the fourth quarter, but oil usage is facing more regional economic challenges and resistance to the shift towards cleaner fuels. The demand growth forecast for 2025 has been reduced from 1.74 million bpd to 1.64 million bpd.

The International Energy Agency expects global oil demand to grow by an average of 860,000 bpd this year, a decrease of 40,000 bpd from previous forecasts, as rapid consumption slowdowns put pressure on the global outlook. Global demand grew by 680,000 bpd in the third quarter, the lowest growth rate since the fourth quarter of 2022. The agency stated that it expects China to return to moderate growth in the fourth quarter of this year and in 2025, with annual demand expected to increase by 220,000 bpd, "The recently announced government economic stimulus plan is expected to support the economy's recovery and get back on track."

The demand side is expected to stabilize. The International Monetary Fund (IMF) released its latest World Economic Outlook report last week. The report stated that during the process of disinflation, the global economy has shown unusually strong resilience, and it expects the global economic growth rate to be 3.2% for both 2024 and 2025.

However, the potential on the supply side may put pressure on the supply and demand situation. The International Energy Agency stated that non-OPEC+ production is expected to grow by 1.5 million bpd in 2024 and 2025, driven by the United States, Guyana, Canada, and Brazil. It is worth mentioning that the U.S. Energy Information Administration (EIA) previously announced that domestic crude oil production in the United States once again reached a historical high of 13.5 million bpd this month, while domestic commercial inventories are also continuing to rise.

On the other hand, OPEC+ will gradually lift its voluntary production cut of 2.2 million bpd starting in December to regain market share. Kieran Tompkins, a climate and commodity economist at Capital Economics, wrote, "Although the focus of the oil market has shifted to geopolitical risks and potential short-term supply disruptions, it is equally important that we believe the possibility of Saudi Arabia opening the floodgates has increased, with reports that cohesion among OPEC+ member countries is deteriorating." He said.

Citigroup's commodity team stated that after Israel launched an attack on Iranian military targets, the "risk premium" for crude oil may decrease. The bank lowered its short-term Brent crude oil price target by $4 to $70 per barrel and increased the likelihood of this base scenario by 10% to 70%. Citigroup also retained the outlook that could lead to Brent crude oil average price targets of $65 per barrel in the first quarter, $60 per barrel in the second quarter, and $55 per barrel in the fourth quarter.