Dip-Buying, OPEC ‘Magic Mantra’ Lift U.S. Crude From Lows

© Reuters.

By Barani Krishnan

Investing.com - Barely 24 hours after oil’s sharpest selloff since early October, bulls were back to buy the dips and bring U.S. crude to a higher settlement on Thursday.

Brent closed lower for a second straight day. But with another day left to the end of the week, it would be no surprise if the losses accrued since Tuesday in both WTI and Brent are erased altogether and the market posts a tenth straight week of gains.

Thursday’s recovery from session lows were aided by two things.

The first was oil bulls’ realization that the three-year low in crude inventories at the Cushing, Oklahoma storage hub was a better play on the market’s psychology than any possibility of Iran and Western nuclear inspectors achieving a deal that could remove sanctions on Tehran’s crude exports.

The second was the magic mantra OPEC+ never fails to use before the start of each monthly meeting: that supply will get even more short in the coming month or quarter. 

And right on cue, a headline screamed on Thursday as the so-called Joint Technical Committee of the oil producing cartel got together for a meeting: “OPEC+ SEES A TIGHTER 4Q OIL MARKET IN PRELIMINARY DATA - DELEGATE”. The broader cartel itself, led by OPEC+ oil ministers, meets on November 4.

Not surprisingly, U.S. West Texas Intermediate crude settled up 15 cents, or 0.2%, at $82.81 per barrel. WTI hit a two-week low of $80.67 earlier in the session. On Monday, it fell 2% for its sharpest loss in three weeks.

London-traded Brent, the global benchmark for oil, finished the session down 26 cents, or 0.3%, at $84.32. Brent hit a three-week low of $81.62 earlier in the session, after also losing 2% on Wednesday.

“The rally has looked overcrowded for some time now so the correction we've seen doesn't come as a great surprise,” Craig Erlam, analyst at online trading platform OANDA, said. “The question though is whether that's it? It's interesting how quickly traders have bought the dip.”

Just a day ago, crude prices bottomed for October on the possibility of Iran holding nuclear talks with Western powers amid Tehran’s bid to free itself from U.S. sanctions prohibiting the sales of its oil to the world.

A weekly build in U.S. crude stockpiles had also weighed on the market as the EIA, or Energy Information Administration, reported an inventory level double to market expectations. The rise came as refiners boosted raw oil imports last week to make more products like gasoline and diesel, while exporters of crude shipped out less.

To be fair, some of the negative factors in oil haven't been enough — and were even counterproductive at times — to bring a meaningful correction to crude prices.

For instance, Iran’s hardline regime under President Ebrahim Raisi has constantly upended Western efforts to reign in the Islamic Republic's nuclear program.

And while U.S. crude inventories may have risen in the latest week, stockpiles at the Cushing hub — a more important metric sometimes to the market — fell another 4 million barrels, hitting lows since 2018.

For perspective, over the past 10 weeks, any daily correction of 1-2% on WTI or Brent has often been overturned by a 4-5% surge by the end of the week.

While the current narrative in oil is overwhelmingly bullish, often the littlest of positive developments are magnified by those on the long side of the trade to blow the rally out of proportion.

Helping the oil narrative is, of course, OPEC+ whose mission is to ensure that global output of crude remains at about a fifth of immediate needs. In any ordinary market, that would be deemed as deliberate stifling of natural production to create a lopsided market. But in OPEC terminology, it’s called “rebalancing”.