Please read part 1 published on September 18.
The global economy continues to slow. That's the prevailing consensus sentiment. Global refining margins, impacted by the tightness in crude supply, have now fallen below the 5-year average prompting traders and investors to question just how strong demand is. Saudi and Russia's production cut is set to end in December, and with global oil inventories looking like they will build in Q1, why should prices remain elevated?
All of these concerns persist in the oil market. And as we wrote back a month ago, nothing has changed. Oil prices hit the key resistance level and have since fallen back to $86. The next key resistance level to surpass is around ~$89 to ~$91, a clear break above that will give it a sightline to $100. But can that be achieved despite all of these headline worries?
Yes. But the path ahead is not going to be linear and it won't be right away.
As we mentioned in part 1 of the report, refinery maintenance in October will stymie some of the inventory draws. But as we start to exit out of refinery maintenance season, global oil inventory draws will accelerate again. Global floating storage is at a new low (matching 2018), and that's starting to grab some attention.
But this is really just a function of what's going on in the underlying supply and demand. With the voluntary production cut expected to last into December, global oil inventories will draw, but the market will start to look past that. What happens in Q1?
We think the next clear catalyst for the oil market will be the extension announcement from Saudi and Russia. We think the timing could be early November when it is announced that they will extend to the end of Q1. Some of the oil bears will point to the necessity of the production cut as a means to stop global oil inventories from building, and oil bulls will point to it as a sign that the Saudis want higher oil prices. The reality is that the Saudis will not want all of the hard work thus far to go to waste. With Q1 expected to show builds of ~1 to ~1.5 million b/d (according to IEA), the voluntary production cut is needed to prevent a reversal in oil inventories.