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Oil tumbles on risk aversion as Q4 starts; bulls look to OPEC

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Oil tumbles on risk aversion as Q4 starts; bulls look to OPEC
© Reuters.

Investing.com – No market operates in a vacuum — including oil, no matter what the proponents of higher crude prices think.

Worries that inflation will rear its ugly head again to suppress demand in almost everything set off a wave of risk aversion on Monday that handed global markets an ominous start to the fourth quarter. 

The surge to a new 10-month high added to the weight of commodities denominated in the U.S. currency. The dollar shot up as a number of policy-makers at the Federal Reserve hinted on Tuesday at another rate hike in either November or December to keep under control and nearer to the central bank’s 2% per annum target from a current 3.7%.

On the crude oil front, New York-traded West Texas Intermediate, or WTI, and London’s Brent fell about 2% each, extending losses from Friday. The two crude benchmarks had risen nearly 30% in the third quarter, threatening a new round of chaos to economies in non-oil producing countries.

While September manufacturing data, via the , improved in both the United States and Europe, economists saw that as more of a work-off on inventories of raw materials in hold. The concern is how the global economy would fare for the rest of 2023 if energy prices continue rising without control, adding an onerous burden to overheads.

“The damage that can be done to the economy by high oil prices is very real and it’s completely delusional to think this is acceptable for the bulk of the world which does not produce oil but instead consumes it,” said John Kilduff, partner at New York energy hedge fund Again Capital.

for delivery in November settled at $88.82 — below the key $90 per barrel mark — after sliding $1.97, or 2.2%, on the day. The U.S. crude benchmark hit a three-week low of $88.47 earlier.

for the most-active December contract settled at $90.71, down $1.49 cents or 1.6%. The global crude benchmark plunged to $90.36 earlier.

On the brighter side of oil, OPEC+, the 23-nation alliance of oil producers, is to meet on Wednesday. The proponents of higher crude prices are counting on OPEC+ — which groups the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 independent oil producers steered by Russia — to reignite the upward momentum held by the market over the past four months.

But sources within OPEC+, speaking privately to media, said the alliance is unlikely to tweak production targets for November and December. 

The Saudis and Russians pledged last month to cut at least 1.3 million barrels per day of their regular production until the end of the year, in what many believe was a bid to bring crude back to $100 a barrel or more. U.S. crude went from lows of beneath $64 a barrel in May to above $95 in September, while global benchmark rallied from below $72 to above $97 in the same span.

At the same time, OPEC+ may have paid a different “price” for such action. 

Asia’s crude oil imports slipped for a second consecutive month in September as refinery maintenance trimmed demand and the impact of higher prices started to weigh, Reuters reported, citing LSEG data. 

The world’s top importing region saw arrivals of 24.95 million barrels per day in September, down from August’s 25.22 million, according to LSEG.

Saudi Arabia and Russia are also anticipating an array of different challenges for the October-December stretch that could make a repeat of their third-quarter market performance difficult.

Notwithstanding the view that OPEC+ might not make changes to its production, pressure appears to be building on the Saudis and Russians to ease back on some of their output cuts in order to have adequate oil for cargoes scheduled for year-end delivery. 

There is also the notion, especially among the Saudis, that they need to protect market share for their oil with the current high prices for a barrel that expose them to risk of under-cutting by their allies, including the Russians. 

Already, India’s imports of Saudi oil were at below 500,000 barrels per day in September — the lowest in almost a decade.

Mixed Chinese data 

On China, ING’s energy analysts observed in a note that while Chinese manufacturing PMI returned to expansion territory in September for the first time since March,  “the Saudis have said that there is still concern over Chinese demand”.

Official data on Saturday showed that China’s factory activity expanded for the first time in six months in September, adding to a run of indicators suggesting the world’s second-largest economy has begun to stabilize.

However, a private-sector survey on Sunday was less encouraging, showing the country’s factory activity expanded at a slower pace in September.

Indeed, a durable recovery in China’s economy is being delayed by a property slump, falling exports and high youth unemployment, raising fears of weaker fuel demand.

Saudis might need to produce more oil, not less

Thus, the Saudis might need to produce more in October — not the same of what they pumped in September and certainly not less — to keep China, India and other important customers happy. 

In fact, crude shipments from Saudi ports likely rose between 300,000 and 400,000 barrels per day last month from August — despite their so-called “lollypop cut” of one million barrels per day — OilPrice.com noted in a roundup of market intelligence gathered from various sources.

And the trend could continue, it said.

The Saudis have also been quite restrained in adding to the Official Selling Price, or OSP, of their crude despite Brent’s runaway rally, that market roundup showed. Saudi Arabia’s medium sour crude grades were hiked by $0.10 per barrel each, moving Arab Light to a $3.60 per barrel premium vs Oman/Dubai. The only Saudi crude grade that saw a notable increase in October was Arab Super Light, a very rare condensate-like grade that sees 1-2 cargoes per month, which rose by $0.50 per barrel. 

“In an environment like this, Saudi Arabia’s national oil company Saudi Aramco (TADAWUL:) was expected to hike Asian prices by a solid margin,” the OilPrice roundup said. “Surprisingly, the anticipated OSP increase did not happen.”

“Overall, the lack of pricing ambition reflected wider worries about the health of Chinese demand into the remaining months of 2023, as well as significantly lower Indian nominations lately.” 

To Moscow’s benefit, India has begun buying Russian urals crude at around $80 per barrel — markedly higher than the $60 price cap set by the G7, but still lower than the flat price of Brent.

But Russia, which has committed to the Saudi production squeeze plan by announcing a 300,000-barrel per day cut of its own, is also under pressure to keep up with deliveries promised to customers.

Russia seen rolling back on fuel export ban  

Moscow recently eased its separate ban on fuel exports introduced to stabilize the domestic market. Analysts do not expect those restrictions to stay for long because they may hit refinery runs and impact relations with customers.

Turkey, Brazil, Morocco, Tunisia and Saudi Arabia were among the main destinations for Russian diesel this year, JPMorgan said in a note.

“(A) protracted export ban would negatively impact the relationship with the new customers that Russian oil companies have so painstakingly built over the last year and a half,” according to JPMorgan.

Even so, Russia has not discussed a possible crude oil supply increase to compensate for Moscow’s fuel exports ban with OPEC+, the Kremlin has said.

That communication might be made directly when the Russians and Saudis hold talks at Wednesday’s OPEC+ meeting.

After having psyched the trade into believing their production cuts could go on indefinitely and against market reality, it would be important for neither side not to publicly admit anything to the contrary and work instead in keeping up the narrative they have created.

Commodities

Canadian wildfire reaches Jasper, firefighters battle to protect oil pipeline

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(Reuters) -A wildfire reached the Canadian town of Jasper, Alberta on Wednesday, one of hundreds ravaging the western provinces of Alberta and British Columbia, as firefighters battled to save key facilities such as the Trans Mountain Pipeline, authorities said.

Wildfires burning uncontrolled across the region include 433 in British Columbia and 176 in Alberta, more than a dozen of them in the area of Fort McMurray, an oil sands hub.

The pipeline, which can carry 890,000 barrels per day (bpd) of oil from Edmonton to Vancouver, runs through a national park in the Canadian Rockies near the picturesque tourist town, from which about 25,000 people were forced to evacuate on Tuesday.

“Firefighters … are working to save as many structures as possible and protect critical infrastructure, including the wastewater treatment plant, communications facilities, the Trans Mountain Pipeline,” Parks Canada said in a post on Facebook (NASDAQ:).

The pipeline operator did not immediately respond to a Reuters request for comment, but said earlier it was safely operating the pipeline and had deployed sprinkler protection as a preventive measure.

In the day’s last update, Jasper National Park said it could not report on the extent of damage to specific locations or neighbourhoods, and that it would provide further updates on Thursday.

Canadian Prime Minister Justin Trudeau said his government approved Alberta’s request for federal assistance.

“We’re deploying Canadian Armed Forces resources, evacuations support, and more emergency wildfire resources to the province immediately – and we’re coordinating firefighting and airlift assistance. Alberta, we’re with you.”

The town, and the park, which draws more than two million tourists a year, were evacuated on Monday night, at a time when officials estimated there were 15,000 visitors in the park.

© Reuters. Smoke rises from the Lower Campbell Creek wildfire (K51472) wildfire northwest of Beaverdell, British Columbia, Canada July 24, 2024.   BC Wildfire Service/Handout via REUTERS.

Deteriorating air quality forced firefighters and others lacking breathing equipment to evacuate to the town of Hinton, about 100 km (62 miles) away, park authorities said on Facebook on Wednesday evening.

Officials of Parks Canada earlier said they expected rain to arrive overnight.

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Commodities

Gold prices slide as safe haven plays favor yen; Copper losses deepen

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Investing.com– Gold prices fell in Asian trade on Thursday, seeing little safe haven demand despite increasing risk-off sentiment as traders rode a sharp appreciation in the Japanese yen. 

A rout in broader commodity markets also raged on, with copper prices extended a sinking to a near four-month low amid persistent concerns over top importer China. Weak readings on manufacturing activity from the U.S., Germany and Japan also soured copper’s outlook. 

slid 0.9% to $2,376.11 an ounce, while expiring in August tumbled 1.7% to $2,375.40 an ounce by 00:52 ET (04:52 GMT). 

Gold prices retreat as safe haven plays, rate hike bets favor yen 

The yellow metal saw little safe haven demand even as global markets experienced a sharp drop in risk appetite, with traders pivoting into the Japanese yen. The yen’s pair, which gauges the number of yen needed to buy one dollar, sank to an over two-month low on Thursday. 

The yen benefited from an unwinding in short positions over the past week, following suspected currency market intervention by Tokyo. But speculation over a potential interest rate hike by the next week also benefited the yen, especially as recent data signaled some resilience in the Japanese economy. 

Gold and metal markets took little advantage of a drop in the dollar, which retreated before a slew of key U.S. economic readings in the coming days. data for the second quarter is due later on Thursday, while data- the Federal Reserve’s preferred inflation gauge- is due on Friday. 

Other precious metals also retreated. slid 1.1% to $949.60 an ounce, while tumbled 4.2% to $28.098 an ounce, unwinding a bulk of their recent rally.

Copper losses deepen amid demand jitters 

Among industrial metals, copper prices fell further on Thursday, facing increased selling pressure amid concerns over a slowdown in global demand. 

Benchmark on the London Metal Exchange slid 1.6% to $8,960.50 a tonne- breaking below $9,000 for the first time since early-April. One-month fell 0.6% to $4.0540 a pound.

Both contracts were nursing steep losses in recent sessions, amid growing concerns over demand in top importer China, following a string of underwhelming economic readings from the country.

Concerns over a demand slowdown were furthered by weak manufacturing activity data from the U.S., Japan and Germany, which showed industrial activity was on the backfoot.

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Commodities

Oil down $1 as muted Chinese consumption outweighs inventory draws

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By Noah Browning

(Reuters) -Oil prices fell on Thursday as demand signals from lacklustre Chinese consumption outweighed the previous day’s data showing large draws on U.S. inventories.

futures for September fell $1.01, or 1.2%, to $80.70 a barrel by 1117 GMT. U.S. West Texas Intermediate crude for September slid $1.2, or 1%, to $76.67.

Both benchmarks rose on Wednesday, snapping consecutive sessions of declines after the Energy Information Administration said inventories fell by more than expected to 3.7 million barrels last week. [EIA/S]

U.S. gasoline stocks dropped by 5.6 million barrels, against analyst expectations of a 400,000 draw.

“Despite draws in U.S. crude and gasoline stocks, investors remained wary about weakening demand in China and expectations of advancing ceasefire talks between Israel and Hamas added to pressure,” said Hiroyuki Kikukawa, president of NS Trading, owned by Nissan (OTC:) Securities.

China’s oil imports and refinery runs this year have trended lower than in 2023 on weaker fuel demand amid sluggish economic growth, government data shows.

“Growing concerns over the strength of oil demand in the short to medium term have acquired a strong grip on market sentiment,” said Vandana Hari, founder of oil market analysis provider Vanda (NASDAQ:) Insight.

In the Middle East, efforts to reach a ceasefire deal to end the war in Gaza between Israel and militant group Hamas have gained momentum over the past month. A breakthrough could erode lingering threats to supply and send prices lower.

The U.S. Federal Reserve, meanwhile, is expected to cut interest rates only twice this year, in September and December, according to a Reuters poll of economists, with resilient U.S. consumer demand prompting a cautious approach despite easing inflation.

© Reuters. FILE PHOTO: An aerial view shows a crude oil tanker at an oil terminal off Waidiao island in Zhoushan, Zhejiang province, China January 4, 2023. China Daily via REUTERS/File Photo

Lower interest rates should spur economic growth, leading to more oil consumption.

In Canada, hundreds of wildfires are burning in the western provinces of British Columbia and Alberta, including in the area of oil sands hub Fort McMurray.

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