The Commodities Feed: The complex comes under pressure


Oil came under further pressure yesterday, with ICE Brent settling almost 1.2% lower on the day. This downward pressure has continued in early morning trading today, with Brent down more than 1% and trading below US$68/bbl at the time of writing. Oil got caught up in the broader market sell-off, with metals and equities also weakening over the day. The spread of the delta variant also continues to cloud the demand outlook for oil. In addition, output data from China earlier in the week, which showed that Chinese refiners processed the least crude in 14 months does little to help sentiment.

The weakness in the oil market in recent days has been led by WTI. Its discount to Brent has widened to almost US$3.20/bbl, which is the widest this spread has been since May. Although oddly, the widening comes despite the fact that we continue to see a tightening in the US oil market. Yesterday’s EIA report showed that US crude oil inventories fell by 3.23MMbbls, which was more than the market was expecting. Inventories at Cushing also declined by 980Mbbls, leaving stocks at the WTI delivery hub at 33.6MMbbls – the lowest level since October 2018. It appears that the only modestly bearish data point from yesterday’s report was that gasoline inventories increased by 696Mbbls due to a slight decline in implied demand. Given yesterday’s price action, the market is clearly more focused on the global demand outlook than EIA weekly numbers.

OPEC+ will also be keeping an eye on demand at the moment. The group is set to meet on 1 September, and whilst their output policy is set until the end of the year, there is always the potential for a change if they feel that this is necessary. As things stand, it is unlikely we see a change. OPEC recently left its demand forecasts unchanged despite the spread of the delta variant, whilst any rollback in the easing of cuts could attract some criticism from the US, who recently asked the group to increase output. However, much will depend on what happens in the market over the next week and a half. One less concern for OPEC+ appears to be Iranian supply. There is still very little in the way of progress in nuclear talks since the new Iranian president took office in early August. The IAEA recently warned that Iran had increased uranium enrichment activity, so a nuclear deal still looks some distance away, and as a result, the lifting of oil sanctions as well.