Neither Israel’s invasion of Gaza, nor the increase in Chinese oil imports, nor the extension of production and export reduction commitments by Saudi Arabia and Russia have frightened the Brent bears. The quotes of the North Sea grade plummeted to their lowest level since the end of August against the backdrop of decreasing premiums for geopolitical risk and concerns about global demand reduction.
Oil put options are now more expensive than call options for the first time since the start of the armed conflict in the Middle East. The premium for the risk of an escalation in geopolitical tensions disappeared as investor confidence grew that military actions would not spill over beyond Israel. Initially, the markets believed that the situation might end with an embargo against this country, similar to the 1970s, and tighter sanctions against Tehran. The loading of black gold onto tankers in Iran indeed fell by 194,000 barrels to 1.43 million barrels per day (bpd) in October, the lowest since July. But what the market is more interested in is whether the Middle East conflict will remain local. So far, all signs point to yes, which is why Brent is falling.
Premium Dynamics for Oil Options
Saudi Arabia and Russia have extended their commitments to reduce oil production and exports by 1 million bpd and 300,000 bpd, respectively, until the end of December. However, the narrowing of the spread in futures contracts with different expiration dates indicates that problems with the deficit are gradually disappearing. They will completely vanish if backwardation turns into contango. According to ING, in the first quarter of 2024, the market will face a surplus, so Riyadh and Moscow are likely to extend their commitments more than once. Their actions no longer surprise investors.
Indeed, while OPEC+ cuts production and loses market share, the United States is increasing it. According to the U.S. Energy Information Administration, crude oil production has surged to 13.2 million bpd, a new record. The previous record of 13.1 million bpd was set in March 2020, around the beginning of the pandemic. At the same time, the increase in commercial crude oil inventories by 800,000 bpd to 422.9 million bpd is greater than the Bloomberg experts predicted, indicating a decrease in domestic demand.
Futures Spread Dynamics for Oil
China could potentially compensate for this. Especially since China’s oil imports increased by 13.5% in October, reaching 11.53 million bpd compared to 11.13 million bpd in September. However, it’s important to understand that energy consumption increased due to Golden Week. Meanwhile, the reduction in the export of oil products due to the depletion of government-imposed quotas is a strong argument in favor of selling the North Sea grade. Demand for refineries will decrease.
On the daily chart, Brent’s downward trend continues due to the implementation of the 1-2-3 reversal pattern. Short positions initiated from $89 per barrel and reinforced from $87.5 should be maintained. The target levels are $81.7 and $79.
The material has been provided by InstaForex Company – www.instaforex.com
Neither Israel’s invasion of Gaza, nor the increase in Chinese oil imports, nor the extension of production and export reduction commitments by Saudi Arabia and Russia have frightened the Brent bears. The quotes of the North Sea grade plummeted to their lowest level since the end of August against the backdrop of decreasing premiums for geopolitical risk and concerns about global demand reduction.
Oil put options are now more expensive than call options for the first time since the start of the armed conflict in the Middle East. The premium for the risk of an escalation in geopolitical tensions disappeared as investor confidence grew that military actions would not spill over beyond Israel. Initially, the markets believed that the situation might end with an embargo against this country, similar to the 1970s, and tighter sanctions against Tehran. The loading of black gold onto tankers in Iran indeed fell by 194,000 barrels to 1.43 million barrels per day (bpd) in October, the lowest since July. But what the market is more interested in is whether the Middle East conflict will remain local. So far, all signs point to yes, which is why Brent is falling.
Premium Dynamics for Oil Options
Saudi Arabia and Russia have extended their commitments to reduce oil production and exports by 1 million bpd and 300,000 bpd, respectively, until the end of December. However, the narrowing of the spread in futures contracts with different expiration dates indicates that problems with the deficit are gradually disappearing. They will completely vanish if backwardation turns into contango. According to ING, in the first quarter of 2024, the market will face a surplus, so Riyadh and Moscow are likely to extend their commitments more than once. Their actions no longer surprise investors.
Indeed, while OPEC+ cuts production and loses market share, the United States is increasing it. According to the U.S. Energy Information Administration, crude oil production has surged to 13.2 million bpd, a new record. The previous record of 13.1 million bpd was set in March 2020, around the beginning of the pandemic. At the same time, the increase in commercial crude oil inventories by 800,000 bpd to 422.9 million bpd is greater than the Bloomberg experts predicted, indicating a decrease in domestic demand.
Futures Spread Dynamics for Oil
China could potentially compensate for this. Especially since China’s oil imports increased by 13.5% in October, reaching 11.53 million bpd compared to 11.13 million bpd in September. However, it’s important to understand that energy consumption increased due to Golden Week. Meanwhile, the reduction in the export of oil products due to the depletion of government-imposed quotas is a strong argument in favor of selling the North Sea grade. Demand for refineries will decrease.
On the daily chart, Brent’s downward trend continues due to the implementation of the 1-2-3 reversal pattern. Short positions initiated from $89 per barrel and reinforced from $87.5 should be maintained. The target levels are $81.7 and $79.
The material has been provided by InstaForex Company – www.instaforex.com