Oil Prices Climb Amid Declining US Inventories and Geopolitical Tensions

Price

• Oil prices advanced on Wednesday amid expectations of declining US crude and gasoline inventories, according to a Reuters report. Brent crude futures gained 30 cents, reaching $80.99 per barrel, while the US West Texas Intermediate (WTI) crude increased 38 cents to $78.73 per barrel.
• The American Petroleum Institute (API) reported a substantial drop in US crude inventories by 5.21 million barrels for the week ended August 9, alongside a decrease in gasoline stocks by 3.69 million barrels. MCX Crude oil prices opened at ₹6,618 with a rise of 0.33%.

Demand and Supply

• A wider war in the Middle East may be looming over oil markets, and OPEC is still keeping curbs on supply, but traders are selling. Despite recent gains, the market for crude remains overwhelmingly pessimistic. It would take a supply shock to change this.
• Earlier this month, when Iran swore to avenge the killing of Hamas Leader Ismail Haniya by Israel, oil prices jumped in anticipation of missile strikes. Then they retreated because US and Chinese authorities once again released economic data that disappointed those expecting more robust economic indicators and basing their oil demand outlook on those.
• At the start of this week, oil benchmarks saw another jump based on expectations of a hotter war in the Middle East. However, hours later, OPEC revised its oil demand forecast for the year lower, pushing prices back down.
• The revision was not major—OPEC now expects oil demand growth at 2.11 million bpd, down from 2.25 million bpd—but it was enough to spook traders again.
• Reuters' market columnist John Kemp reported this week that oil traders had been net sellers of crude futures for five weeks in a row. As of August 6, institutional traders' net positions across the six contracts had fallen to the lowest since 2013 when records of these trades started. Since the start of July, the data showed traders' oil positions had dropped by 372 million barrels of oil equivalent.

News

• According to Kemp, the reason for the selloff, in addition to worries about the world's biggest economies and their growth prospects, is anticipation of softer oil demand in the future.
• This anticipation may well be driven by transition forecasts—which have consistently failed to materialize. But traders are using algorithms to make their bets, and those algorithms can turn a market bearish in a flash.
• Bloomberg reported earlier this month that algo trading, where traders rely on software tracking market trends, had been responsible for the fast sentiment change in oil markets following the stock market quake last week.
• At the time, US and Chinese economic data had reignited doubts about the future strength of oil demand, and algo traders had started selling, leading to a price rout in crude.
• This was not the first time algo trading has affected prices in what appears to be an excessive way. In June, an OPEC announcement that it may start rolling back some production cuts later in the year triggered an oil selloff, again led by commodity trading advisors following trends.
• The market reaction to the news was clearly excessive, given that OPEC said it would only roll back the cuts if market conditions suited it, but that got ignored by algorithms.
• It could be the case that algorithms—and the CTAs that work with them—are bearish on future oil demand because of the EV boom forecasts. The actual facts are that EV sales are slowing down and even declining in some key markets, such as Germany, but as governments double down on transport electrification, the forecasts remain upbeat for EVs and bearish for oil.

Expert's Opinion

• It is expected that oil prices will be supported by the International Energy Agency (IEA) maintaining its global oil demand growth forecast for 2024. However, a slight reduction in the 2025 estimate is anticipated due to the anticipated impact of a weaker Chinese economy on global consumption.
• Official data from the US Energy Information Administration, expected later on Wednesday, will provide further clarity on inventory levels and potential demand shifts.