Supply, not demand driving selloff in crude - bank analysts
Quantum Commodity Intelligence – An uptick in crude oil supply has driven a selloff in the futures market in recent weeks, with analysts from investment banks UBS and Barclays pointing to rising output and exports from the US and other origins weighing on prices.
Crude oil prices neared a three-month low during trade on Wednesday, with losses in the Brent crude futures market of more than 12% seen in the past three weeks.
"While oil demand growth is slowing down due to base effects after a strong first half of the year, we think the current price weakness is primarily driven by supply factors," Thursday's note from UBS analyst Giovanni Staunovo read.
The report pointed to strong US and Brazilian crude output, as well as Iranian production hitting a five-year high along with a recovery in September and October OPEC export volumes.
"OPEC member states are still compliant to the production cut deal. But as temperatures decline in the Middle East and cooling demand falls, there is more crude available for exports. Also, while Saudi crude exports remain below July levels, they have risen from August levels, which were the lowest since 2021," the report said.
On the demand side, UBS pointed to weakness in the European market but said demand growth in the US, China, and India remained firm.
Despite the setback, Staunovo forecasted prices should recover to trade in the $90-$100/b range due to lower inventories, although prices are expected to remain volatile in the short term.
Barclays
Investment bank Barclays echoed that view as it lowered its Brent forecast $4/b to $93/b, pointing to easing tightness in its balance forecast and a stronger US dollar.
Analyst Amarpreet Singh pointed to supply-side fundamentals as driving its downward revision, with steady flows from the US and expectations of increased supply from Venezuela after sanctions were eased on Caracas.
The bank said it expects US output for to be around 700,000 bpd higher in Q4 2023 than last year, with another 300,000 bpd of supply expected by Q4 2024.
The sentiment-driven crude selloff seen in recent sessions has been due to creeping negativity over oil demand prospects.
However, even with "with several activity and market indicators suggesting a deceleration in industrial activity since Q3 23," the Barclays report was upbeat on demand from Asia – with the bank's consumption forecast for China raised 200,000 bpd for this year and 300,000 bpd for next.
The report also echoed the growing view that focus on geopolitical risk premium from the Middle East in the market is waning.
While the report said its base case remains that conflict is unlikely to spill out beyond its location, its author conceded that the volatility skew in the options market still suggests plenty of appetite to hedge out upside price risk.
