Energy – SPR refill

The oil market came under significant pressure yesterday as the market digested Israel’s long-awaited response to Iran’s recent missile attack. ICE Brent settled more than 6% lower on the day leaving it at just below $72/bbl. As we mentioned yesterday, the targeted response from Israel does leave the door open for de-escalation, which would allow fundamentals once again to be the dominant driver for the market. And fundamentals are expected to be bearish through 2025. Given the geopolitical uncertainty, many market participants have been protecting themselves from potential spikes higher through the options market. This was not only reflected in traded volumes and open interest in the options market, but also the option’s skew. However, this skew has narrowed significantly since the end of last week, highlighting the broader market view of reduced upside risk.

The Biden administration is looking to buy up to 3m barrels of crude oil for the Strategic Petroleum Reserve (SPR) for delivery at the Bryan Mound site from April-May 2025. The Department of Energy has so far bought more than 55m barrels of crude oil for the SPR at an average price of $76/bbl, compared to the roughly $95/bbl the DoE received from emergency sales in 2022.

The jet fuel market in Asia is showing a lot of strength at the moment and this is reflected in the jet regrade which has spiked higher in recent days. The strength in the regrade has been attributed to run cuts at refineries, while earlier this week there was a rare Chinese import tender for two cargoes of jet fuel.

Metals – Norilsk Nickel output guidance raised

Russia’s MMC Norilsk Nickel increased production guidance for the main metals it produces after finishing repairs on its facilities earlier than expected. The company increased its nickel production guidance from 184-194kt to 196-204kt for the current year. For palladium and platinum, the company raised guidance from 2.3-2.4m ounces to 2.6-2.7m ounces and from 567-605k ounces to 639-664k ounces respectively. Palladium prices surged last week on reports that the US asked other G7 members to consider imposing sanctions on Russian palladium supply.

Agriculture – Excessive rains impact EU crops

The monthly crop monitoring report from the European Commission presents a weaker outlook for crops as intense rainfall over the past few weeks negatively impact both the harvesting (for summer crops) and sowing season (for winter crops). The Commission lowered corn yield estimates from 6.85t/ha to 6.66t/ha, significantly lower than the 5-year average of 7.35t/ha. The prevailing overly wet conditions have also raised concerns about the grain quality in the region.

USDA’s weekly export inspection data shows that grain shipments from the US softened last week; although it remains higher than the levels seen a year ago. For corn, US export inspections came in at 823.7kt, compared to 1,001.2kt from a week ago and 540.8kt reported a year ago. Similarly, soybean inspections slowed to 2,394kt for the current week compared to 2,549kt a week ago, although up from 2,051kt a year ago. For wheat, export inspections dropped from 268kt to 249kt over the week.

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The price of crude oil fell by 6% on Monday to $67 a barrel for WTI and $71 for Brent. This return to the lows of the last two months is due to Israel’s attack on Iran’s oil capacity. The aftermath and retaliatory rhetoric from politicians in both countries have fuelled speculation that both sides are trying to avoid escalation for now. As a result, the geopolitical risk premium has fallen sharply. The price has returned to levels seen before the latest escalation in the Middle East.

In September, the price was near the lower end of its 40-month range, reflecting the slowdown in the global economy. Chinese stimulus has so far been disappointing in its slowness and limited nature. It will take months for the G10 monetary easing measures to reach the markets and reverse the economic trends in the major developed economies.

The US continues to produce strongly. Last week was the second consecutive week of record supply from the states, at 13.5 million bpd. At the same time, the number of oil rigs has been falling for almost two years and now stands at 480. The latter indicator is highly correlated with price but has temporarily lost its link with production levels. This is somewhat curious, as it suggests that companies want to squeeze the maximum out of today’s production but limit investment in future production.

The decline in drilling activity with relatively low inventories might be good news if it were not for the increasing contribution of alternative energy sources to the global energy equation. On the oil chart, the recent fall in prices has tipped the balance in favour of the bears. In October, they managed to keep the price above the 50-month moving average (roughly the same as the 200-week moving average), which had been a key support line since the beginning of the year and was broken in August.

As the new week begins, the price is testing the horizontal support of the last two years. A close below $65 in October would be a major bearish signal that could accelerate oil’s decline. There is a risk of a dam bursting, with the next downside target being the $50 area, a psychologically important intermediate level. The history of the 2008-2009, 2014-2015, and 2020 collapses suggests that the final ‘bottom’ may not come until the $30-35 area.