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Oil Bulls’ Unlearned War Lesson: $100 Pricing Needs Real Trade Disruption

By Investing.com (Barani Krishnan)CommoditiesOct 31, 2023 05:23AM ET
www.investing.com/analysis/oil-bulls-unlearned-war-lesson-100-pricing-needs-real-trade-disruption-200643185
Oil Bulls’ Unlearned War Lesson: $100 Pricing Needs Real Trade Disruption
By Investing.com (Barani Krishnan)   |  Oct 31, 2023 05:23AM ET
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  • More than three weeks into Israel-Hamas war, crude prices are barely any higher than where they were before start of conflict 
  • In fact, Russia-Ukraine war and similar declining impact on oil prices was a lesson not learned by oil bulls 
  • WTI could break below $80 a barrel, though a rebound also possible, given volatility 

Real impact, not just proximity: That’s the takeaway for oil bulls who expected the Israel-Hamas war to guarantee pricing at $100 per barrel or more, only to realize that even the worst fighting the Middle East has seen in decades cannot give them a free ride unless the crude traffic itself takes a hit.

More than three weeks into the conflict that has killed nearly 10,000 people and shocked the world almost daily with one headline of escalation after another, crude prices are barely any higher than where they were before the start of the whole thing. 

The whole thing has a ring of familiarity to it; a sort of a deja vu. Oil bulls also went on the overdrive after Russia’s invasion of Ukraine in February 2022, sending prices to above $139 for global benchmark Brent and above $130 for US crude’s West Texas Intermediate, or WTI.

WTI Daily
WTI Daily
All charts by SKCharting.com, with data powered by Investing.com

From there, prices began a descent that sharpened month after month, with WTI reaching below $64 by May this year and Brent falling to a little above $70 by March. At the height of the Ukraine war, there was real dysfunction to the global oil trade from sanctions on Russian oil and supply bottlenecks still in place after COVID-19 outbreak.

Despite that, the release of hundreds of millions of barrels of US emergency crude supplies calmed the market, eventually wiping out any war premium for oil.

Fast forward to now: OPEC+ — the 23-nation alliance of oil producers that combines the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 independent producers led by Russia — is cutting 3.66 million barrels in daily supply.  

Despite those cuts, concerns over demand destruction continue to pressure crude prices. 

Oil Prices In Yo-Yo Mode

Crude longs thought the Israel-Hamas war would provide the prop to take oil back to triple-digit pricing. As the days pass, that proposition seems more challenging with crude prices standing not far from where they were before the fighting began.

Case in point: The front-month in US West Texas Intermediate, or WTI, crude settled at $82.79 per barrel on Oct. 6, one day prior to the Hamas attack in southern Israel that triggered the war. 

At the time of writing, the front-month for the US crude benchmark was at $83.02, having settled at $82.31 in the previous session and struck a three-week low of $81.82. The best WTI did was $90.78 on Oct 20.

In fact, WTI has been in yo-yo mode for a week now, rising or falling more than 2% in a session, as traders scratched their heads on what sort of risk premium to attach to a war which has virtually had zero impact thus far on the global oil trade.

Brent, the crude of UK-origin, has done better, of course, going from an Oct 6 price of $84.58 to $93.79 on Oct 20. At the time of writing, Brent was at $86.92.

But while the global crude benchmark has performed better than WTI, but it still way below the three-digit bet of oil bulls.

Traders said It would be remiss to say the market wasn’t following the war in the Middle East that erupted on October 7 after Hamas gunmen paraglided into Israel and killed nearly 1,500 Israelis and took some 200 hostage. 

War Premium? Really?

But there has also been no disruption to oil traffic in the Middle East — particularly with barrels moving in waters around the battle zone — and, as such, it is hard to maintain a war premium risk for crude just on grounds of proximity, those in the know said.

“What war premium?” Ed Moya, analyst at online trading platform OANDA, asked in his market note on Monday.

“Crude is lower as two wars have yet to disrupt crude flows. ​ As Middle East crude supply concerns ease, demand destruction is happening and it could get a lot worse if ​ the bond market selloff returns,” Moya said, referring to the concurrent run-up in bond yields that forced oil to plunge as hard as it rose on many occasions over the past three weeks as investors feared a global economic slowdown, or at least an European recession.

Added Moya:

“If global bond rates end much higher, (at what) will be consider(ed) uncomfortable levels, that will crush both the short-term growth prospects and the crude demand outlook.”

“As Middle East crude supply concerns ease, demand destruction is happening. This slide in oil prices means that geopolitical angst won't be enough to send prices higher. ​ Too much demand destruction is happening and the oil market is losing its tightness despite all the risks to supply flows that remain on the table.”

Many who were long crude had expected the market to take off with the ground invasion of Gaza that Israel had held back for weeks as global powers tried to negotiate the block release of the 200 over Israeli hostages held by Hamas. But as a deadline that Prime Minister Benjamin Netanyahu set for himself expired on Friday, Jerusalem continued with its mission to flush Hamas once and for all from the Palestinian territory, ruling out any ceasefire. 

CMC Markets analyst Tina Teng, commenting on this, said:

"Despite an escalation in the Hamas-Israel war, the ground invasion was widely expected. The weekend playout signals no further expansion into a wider regional war, which caused a retreat in oil prices."

Weekend playouts, as referenced by Teng, typically involves a dose of reality for oil bulls on Monday when trading usually gets to a sluggish start from sheer hype or premium from uncertainty built up on a Sunday.

John Evans of oil broker PVM said in comments explains this phenomenon.

"There is a propensity for market users in all their guises to have at least some oil length going into the weekends and when the fear of conflict spread shows no validation come the early hours of Monday mornings' openings, that fear hedge is ordinarily unwound," 

Good, Sound Reason for Oil Selloff?

And sometimes, there's good, sound economic reason for such unwinding, like this week.

Crude prices tumbled almost 4% on Monday as speculation over the Federal Reserve’s interest rate decision later in the week extended the flip-flop over the war risk premium that oil ought to assign to the fighting going in the Middle East.

Concerns over how US jobs numbers for October will turn out on Friday — and how that might impact the Fed’s next rate decision in December — also kept oil traders on the edge.

In the Federal Reserve’s case, while rates are expected to be kept unchanged at its Wednesday policy meeting for November, officials are mulling another rate hike before the end of the year. That could come at the Fed’s December rate decision, especially after several hotter-than-expected inflation readings.

Traders are also wary about the US non-farm payrolls report for October due on Friday. After a blockbuster 336,000 jobs were added in September, economists are expecting more moderate jobs growth of 182,000, which is still consistent with a robust labor market.

The unemployment rate is expected to remain at 3.8%, while wage growth is expected to ease to 4% year-on-year, which would mark a post-pandemic period low, and could help bolster the Fed’s view that price pressures are easing and that it doesn't need to raise interest rates any further, relieving pressure on economic activity in the largest oil consumer in the world.

Ahead of Friday’s data, market participants will be looking at data on third-quarter employment costs on Tuesday for signs that wage growth is moderating.

But before the Fed meeting, markets are also awaiting key purchasing managers index data from China, which is set to shed more light on business activity in the world’s biggest oil importer.

China’s economy has shown some signs of stabilizing in recent months after seeing a sharp decline in growth this year. The country’s aviation regulator recently said it will increase domestic flights to 34% above pre-pandemic levels- a positive sign for oil demand, although air travel still makes up a small portion of China’s overall fuel consumption.

The Bank of Japan is also set to meet on Tuesday, with traders pricing in a potential policy shift in the bank as it grapples with rising inflation.

WTI Outlook — A Break Below $80 Likely, Though Rebound Possible, Too, Given Volatility 

WTI Weekly
WTI Weekly
The US crude benchmark looks poised to go below $80 a barrel if its current rate of decline continues, though the potential for it to rebound to current from that break below is also fairly high — given the volatility in the market.

Says Sunil Kumar Dixit, chief technical strategist at SKCharting.com:

“Amidst the daily whipsaw price action, WTI shows a typical consolidation towards immediate support seen at the 100-day ascending SMA, or Simple Moving  Average of $81.30, followed by the horizontal support of $80.90.

If this zone fails to hold as support,  look for a drop to $79.35, below which the 200-day SMA, statically positioned at $78.10, would be eyed.”

Dixit said worthy of market attention, is that as long as geopolitical crises such as Gaza and Ukraine remain unresolved,  supply chain concerns will continue to make oil a buy-the-dip than and sell-the-rally play.

“Meanwhile, WTI at $84.80 and $85.50 zone will continue to pose a challenge for any recovery attempts to establish a rebound and reclaim the $90 perch.”

WTI 4-Hourly
WTI 4-Hourly

***

Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.

Oil Bulls’ Unlearned War Lesson: $100 Pricing Needs Real Trade Disruption
 

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Oil Bulls’ Unlearned War Lesson: $100 Pricing Needs Real Trade Disruption

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Comments (11)
Czobe Ramt
Czobe Ramt Nov 02, 2023 3:47PM ET
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You write nice articles Barani. You don’t have to respond to every f-ool that posts under your articles. Just keep up the good work. Although I totally disagree with you and we will see the $100 for oil :)
Barani Krishnan
Barani Krishnan Nov 02, 2023 3:47PM ET
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Thanks much, Czobe. I have fun engaging with my readers, LOL. But it's really appreciative people like you who keep me going. Yes, we'll see about the $100/b
Marcus Cicero
Marcus Cicero Oct 31, 2023 5:42PM ET
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No position here. This article looks like an "I told you so" article, but did the author unequivocally predict the current price of oil? I skimmed through the article but did not see any links to past, unequivocal predictions.
Michael J Cox
Michael J Cox Oct 31, 2023 5:42PM ET
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Premise for every “article” is being radical advocate for killing fossil fuels…carbon pollution. He mirrors all per Biden, Kerry’s wild ridiculous push of “climate control”. He authors many https://investing.com dire news flashes, and I know it’s him immediately. Keen O&G folks recognize the same, best to same your time and stay away.
Barani Krishnan
Barani Krishnan Oct 31, 2023 5:42PM ET
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Marcus, this is no way meant to be a "I-told-you-so" story; rather, it's just a reflection that the market ought to have heeded the lessons from Ukraine, where unless there is real daily disruption in barrel delivery, a war premium would not hold.
Barani Krishnan
Barani Krishnan Oct 31, 2023 5:42PM ET
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Michael J Cox  Who the heck told you that I author many of the site's flashes?? LOL, I wish that was true. Investing just puts me on their front-page because they like what I do and I have a seizable following of readers. And I know you and your ultra right bunch hate that!
Cade Havard
Cade Havard Oct 31, 2023 9:22AM ET
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Thank you for your insight. In my opinion rarely is the market in more if a state of flux with counteracting influences. I bekieve $100 is not realistuc until the war demonstrates some effect on oul flows.
Barani Krishnan
Barani Krishnan Oct 31, 2023 9:22AM ET
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Thanks really for weighing, Cade. My thoughts exactly. Not a single barrel has been impacted thus far by this.
سوسو رانيا
سوسو رانيا Oct 31, 2023 9:22AM ET
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I want to receive invoices
The Lim
The Lim Oct 31, 2023 8:47AM ET
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Buy before go to moon...
Michael J Cox
Michael J Cox Oct 31, 2023 8:47AM ET
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Will be choppy, as it’s been, and then boom. Israel rightfully plotting territory before main full ground invasion.
Joniel Monasterio
Joniel Monasterio Oct 31, 2023 8:12AM ET
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Thank you for your analysis, could you review natural gas, is an increase in demand possible for this year or next year?
Barani Krishnan
Barani Krishnan Oct 31, 2023 8:12AM ET
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Hello Joniel, on Wednesday I will. Thank you.
Mitchski Love
Mitchski Love Oct 31, 2023 8:02AM ET
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b.s....your charts won't help in World war 3
Barani Krishnan
Barani Krishnan Oct 31, 2023 8:02AM ET
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Clear the b.s. in your head and focus on what the story is about instead of your typical silly diversionist ideas.
Michael J Cox
Michael J Cox Oct 31, 2023 8:02AM ET
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Barani Krishnan Comical garbage again. US run by fossil fuel hater, Biden, who did all in his power to suppres oil. Not just simple $100 but $140 probable in the very near future. Been trading oil stocks, long and short, only on progress with what will be end of Iran and their proxy terrorists. Supersedes all. Same president been funding no. 1 terrorist state, which led to this juncture. USA wide open borders too, which spur final event for WW3. Biden “eased” sanctions on Venezulia days after massacre to help hold down crude while they are illustrating where the market is heading.
Barani Krishnan
Barani Krishnan Oct 31, 2023 8:02AM ET
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You should have been Tom Clancy... Amazing war theories you have... LOL
Michael J Cox
Michael J Cox Oct 31, 2023 8:02AM ET
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Barani Krishnan i’m glad we can all get along even though we don’t always agree.
jumali aditya prasetia
jumali aditya prasetia Oct 31, 2023 7:44AM ET
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buy #OIL 82.677 tp 85.000
Lio Gutierrez
Lio Gutierrez Oct 31, 2023 7:30AM ET
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Well according to HFI research the US won't see much of a build this refinery maintenance season and products are still drawing but at a slower pace the market tightness will remain. Ed moya is just trying to predict the future with his demand destruction claim he will either be right or wrong he's just guessing at this point.
Barani Krishnan
Barani Krishnan Oct 31, 2023 7:30AM ET
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Hello Lio, thanks for your thoughts. I think the market's sheer volatility has caught everyone by surprise, especially the long oil crowd banking on $100. That's what the story is really about.
Oct 31, 2023 6:43AM ET
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If only the EIA would bring up real inventories they now actively fix the inventory reports of months ago where it was first a draw now suddenly a build
Barani Krishnan
Barani Krishnan Oct 31, 2023 6:43AM ET
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It always amuses me how people cry wolf over EIA reports that cite higher production or builds, then immediately defend any cutbacks the agency does, saying it's numbers are good. This is the agency that even the Saudis watch like a hawk in their "market fixing" -- yes, that is the real correct phrasing of oil production cuts done in collusion between one county and another to control the supply of something in contravention to the spirit of the WTO.
Royce Murph
Royce Murph Oct 31, 2023 5:38AM ET
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I always have to laugh at the words “demand destruction”. As you and i both know this is a political phrase only. The world consumption metrics say otherwise. With that said, i am very comfortable with wti in the ranges of $75-85. Its just good business all the way around till we find a viable 0 carbon footprint alternative
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Barani Krishnan
Barani Krishnan Oct 31, 2023 5:38AM ET
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Lio Gutierrez  But not for the rapacious greed of the Saudi princes.
Royce Murph
Royce Murph Oct 31, 2023 5:38AM ET
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Barani Krishnan  US crude output reaches monthly record in August at 13.05 million bpd -EIA   NO DEMAND DESTRUCTION, so please stop being political.. It just doesn't work for you.. haha
Royce Murph
Royce Murph Oct 31, 2023 5:38AM ET
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Barani Krishnan  I would also challenge the EIA for not taking into account the Trillions of USD that Biden has printed these past 3 years = inflation..
Barani Krishnan
Barani Krishnan Oct 31, 2023 5:38AM ET
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Royce Murph  Output doesn't necessarily equate demand; you surely know that.  US oil, on the contrary, is filling underserved pockets from Saudi obstinacy and profligacy for $100 that's coming back to bite the House of Saud in the rear where market share is concerned. (that's not a net gain for demand, just America winning where Saudi are willingly taking losses). To ensure Saudi oil remains competitive, his  High Royal Highness -- dubbed the Taylor Swift of Energy by some of his admirers -- has told Aramco to drop Saudi OSP. So, tell me, if demand is really as great as what OPEC is shouting, then why the need to drop OSPs?
my name is goldsilverlight
my name is goldsilverlight Oct 31, 2023 5:38AM ET
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Tell me how come oil was worth over $120 in the past, was world's demand at those times stronger (please in bpd literally) and supply more fragile than it is now?
 
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