Trading Signals 05/02 – 09/02
Oil Market Overview
Brent crude prices are climbing towards the $80/barrel mark. A continuous surge in prices has pushed Brent to its highest levels since early December. The primary driver behind this increase is traders betting on rising fuel costs due to the extended transportation distances for oil deliveries from the Middle East.
The recent optimism about a potential Federal Reserve rate cut in 2024 has been bolstering the appetite for riskier assets, particularly in the stock market. However, investors seem to be overlooking Federal Reserve officials’ comments that the U.S. central bank might maintain its rate longer than the market anticipates. This sentiment is also positively impacting the oil market.
A key factor traditionally driving up the prices of “black gold” is the escalating tension in oil-producing regions and issues in transportation routes. This week, several major oil companies have temporarily halted their tanker transits through the Red Sea.
The Suez Canal route, accounting for about 10% of global oil flows, is a critical direction for maritime oil deliveries. Rerouting around Africa adds 10-14 days to the journey between Asia and Europe, leading to increased costs for maritime logistics, higher cargo insurance rates, and ultimately, more expensive fuel. Notably, the issue of attacks on vessels in the Red Sea emerged precisely when, despite OPEC+’s decision to cut production, oil prices remained weak, with no further price-stabilizing steps expected from the cartel.
It’s important to note that the issues with the Red Sea trade route are temporary. To address them, the U.S. and its allies are considering military strikes against Iran-backed Houthi rebels in Yemen, as the actions of a previously formed combat group may not be sufficient to eliminate the threat to this vital waterway.
Goldman Sachs Group analysts believe that the shipping problems in the Red Sea are unlikely to significantly impact crude oil and liquefied natural gas prices. There are alternatives for rerouting supplies, so there’s no direct effect on production. Approximately 7 million barrels of oil pass through the Red Sea daily. If logistics change for an extended period, it could raise spot oil prices by about $3–4/barrel, as floating storage volumes increase and the availability of commercial reserves globally decreases.
Meanwhile, Russian oil and LNG continue to be shipped through the Suez Canal. Russian oil companies are still using the Red Sea route for exports, with more than half of Russia’s maritime oil export, or about 2 million barrels/day, passing through. At the same time, major European companies have suspended oil transit through this troubled region.
Excluding the temporary nature of the Red Sea issues, it must be acknowledged that oil prices have been under pressure towards the year’s end, as a severe global oil shortage due to OPEC+’s actions did not materialize. Doubts about OPEC+’s readiness to cut production as planned, and increased oil production outside the OPEC cartel, mean that a reduction in geopolitical risks in the Middle East could cool oil prices again.
Meanwhile, last week’s maritime shipments of Russian oil dropped to 3.2 million barrels/day, down from the previous week’s high of 3.8 million barrels/day. The four-week average export rose from 3.2 to 3.28 million barrels/day, about 300,000 barrels/day lower than the average in May and June. Russia seems to be gradually reducing its exports as promised.
According to the American Petroleum Institute (API), U.S. oil inventories might have increased by 0.9 million barrels. Gasoline inventories could have risen by 0.7 million barrels, and distillates by 2.7 million barrels. If the official U.S. Energy Department data confirms this, it could negatively impact oil prices, as it indicates a surplus in fuel supplies.