Analysts have been talking about three-digit oil prices for months now, yet the benchmarks have stubbornly refused to move above $100, whatever happens.
One reason for this is the economic headwinds pressuring prices and keeping them from breaking out above $100. The other: costs related to moving oil around have soared, soaring demand.
Bloomberg reported earlier this month that freight rates on 16 global maritime routes had gone up by 50% since the Hamas attack on Israel. The data came from the Baltic Exchange and concerned the period between October 9 and October 15.
“Shipping historically has benefited from geopolitical turmoil,” John Kartsonas, managing partner at Breakwave Advisors, a shipping-related ETF manager, told Bloomberg. “The urge to secure energy supplies is the first thing in mind of traders when wars or conflicts begin.”
This week, Reuters reported similar data, this time from LSEG, and the report also noted signs of weakness in the physical oil market, suggesting these were about to spill into the futures market, pushing benchmark prices down.
“Globally, demand is tracking sideways from here, and we’re going to see increases in crude supply from non-OPEC. Come January, the market could start looking a bit longer,” the report quotes FGE analyst James Davis as saying.
This is all but a certainty because we are definitely not going to see more supply from OPEC. Saudi Arabia and Russia have signaled they were ready to extend their cuts for as long as necessary to get the prices they want, and some other OPEC members are seeing fewer loadings because of the freight rate problem.
Per the Reuters report, which also cited traders, loadings of crude from Nigeria and Angola have slowed down lately because of the changes in freight rates. As a result, the premium of physical oil prices to benchmarks have already shed between $1 and $2 per barrel.
There is also the issue of lower refining margins. For months, refiners have enjoyed strong margins on strong demand and not too high crude prices. Now, things have started to change as driving season in the U.S. draws to a close, implying lower demand for gasoline and as crude-to-product spreads have declined.
A Bloomberg news outlet reported last week that the Singapore gross refining margin had slumped by 50% since the start of the fourth quarter, reaching $4.80 per barrel at October 15, per Reuters data. For context, the average margin over the second quarter of the year stood at $9.60 per barrel.
All these are signs that weaker prices may be coming because of weaker physical trade. Indeed, benchmarks are already down after the initial surge following the breakout of violence in Israel and Gaza, as expectations for a quick resolution increase amidst diplomatic efforts to put an end to the conflict before it spreads.
But it is the physical market that matters, and there the signals seem to be even stronger. Per the Reuters report, there are between 20 and 30 cargoes of Nigerian crude sitting unsold, along with six or seven cargoes of Angolan crude. Typically, at this time of the year, the amount of unsold cargoes is much lower, Reuters noted in the report.
Meanwhile, margins are falling in the United States, too, which seems to be already affecting refiners’ production decisions. And that’s despite robust exports of crude and fuels this summer.
Some have suggested this is the result of more EVs displacing demand for gasoline. Yet EV sales are still a fraction of total U.S. car sales, so this may be a premature conclusion to make. Instead, it is more likely that refiners are raising their distillate production rates: middle distillates are in a much tighter supply globally, but especially in the United States. And they are reducing run rates because of those falling margins. Those three-digit oil prices may yet be far away.