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War premium fades
ANS slides on lower Israel/Iran escalation risk, weak China demand
Steve Sutherlin Petroleum News
Alaska North Slope crude fell 18 cents Oct. 16 to close at $73.33 per barrel, notching a three-day slide of 6% as worries about oil demand -- particularly in China -- overcame fears of supply interruption being triggered by an escalation of hostilities between Israel and Iran. West Texas Intermediate shed 19 cents on the day to close at $70.39 and Brent slipped 3 cents to close at $74.22.
On Oct. 15, a major slide in oil prices was set loose as media outlets citing anonymous Israeli government officials said Israel would refrain from striking oil facilities or nuclear sites in Iran to retaliate for a 200-missile attack on Israel Oct 1.
ANS plummeted $3.87 Oct. 15 to close at $73.51, while WTI plunged $3.25 to close at $70.58 and Brent plunged $3.21 to close at $74.25.
On Oct. 14, ANS shed 72 cents to close at $77.38, WTI dropped $1.73 to close at $73.83 and Brent dropped $1.58 to close at $77.46.
The Oct. 14 slide reflected concerns about fuel demand in China after the Asian nation failed to provide expected details on the size of additional economic stimulus to revive growth.
The Organization of the Petroleum Exporting Countries added to the gloom as it cut back its expectations for oil demand growth -- not just in China but worldwide.
OPEC now expects worldwide demand to grow by 1.93 million barrels per day in 2024 and 1.64 million bpd in 2025, down from its previous growth estimate of 2.03 million bpd and 1.74 million bpd respectively, it said in its Monthly Oil Market Report released Oct. 14.
OPEC cut its forecast of Chinese growth to 580,000 bpd in 2024 versus previous expectations of 650,000 bpd growth.
OPEC said that the latest round of Chinese government stimulus announced in September had been anticipated in the cartel's outlook, which kept its forecast of China's economic growth rate for 2024 at 4.9%, consistent with the previous month's estimate. The 2025 growth forecast for China was unchanged from the previous month's forecast of 4.6%.
Worldwide crude demand is estimated to hit 104.1 million bpd in 2024 and 105.8 million bpd in 2025, OPEC said.
On Oct. 11, ANS gained 65 cents to close at $78.10, WTI fell 29 cents to close at $75.56 and Brent fell 36 cents to close at $79.04.
Crude prices soared Oct. 10 as traders contemplated a potential strike against Iranian oil assets by Israel. ANS leapt $2.40 to close at $77.45, WTI leapt $2.61 to close at $75.85 and Brent leapt $2.82 to close at $79.40.
From Wednesday to Wednesday, ANS shed $1.72 from its Oct. 9 close of $75.05 to $73.33 Oct. 16.
On Oct. 16 ANS traded at an 89-cent discount to Brent, and at a $2.94 premium over WTI.
Citi hikes bull-case estimate for crude Citi analysts hiked their bull-case estimate to $120 from $80 per barrel for the fourth quarter of 2024, and first quarter of 2025, while assigning such an outcome a probability of 20%, up from 10%, the Wall Street Journal reported Oct. 14.
The bank's base case -- for Brent to average $74 a barrel in the fourth quarter and $65 a barrel in the first quarter of 2025 -- is unchanged "owing to weak underlying oil market fundamentals."
"Our new bull case scenario is based on supply fears and disruptions similar in magnitude and duration to that which occurred (due to the Russian invasion of Ukraine) during 2022," Citi said.
Actual supply losses at that time peaked at less than 1 million barrels a day, well below expectations of losses between 2 million and 3 million barrels a day, Citi said.
Disruptions from an escalation in the conflict between Israel and Iran could exceed those in the outbreak of the Russia-Ukraine conflict, but "higher levels of spare capacity and stock levels, and a weakening demand environment, may mean a similar price response," Citi said.
US could weather oil price shock Now that conflict in the Middle East has spread to Iran, there is a heightened prospect that the U.S. economy will be hit by an oil price shock before the November election, according to Desmond Lachman, senior fellow at the American Enterprise Institute.
"The good news is that our economy is much less vulnerable to such a shock now than it was at the time of the 1970s oil-price shocks," Lachman said in an Oct. 8 Barron's commentary. "This makes it likely that our economy will be in a position to weather that shock without the Federal Reserve having to increase interest rates to contain the inflationary fallout from higher oil prices."
The potential for an oil price shock is not primarily that Israel may damage Iran's oil production, he said, adding that Iran produces 3 million bpd of oil and exports some 1.7 million barrels, which could be made up by Saudi Arabia and the United Arab Emirates, drawing on 5 million bpd of spare capacity.
"The real risk is that Iran could block the Strait of Hormuz, through which around 20% of the world's oil now passes, thereby sharply curtailing the world's oil supply," he said, adding that in a worst-case scenario of a sustained and large Middle East supply disruption, the international oil price could hit $150 a barrel, according to the World Bank.
The U.S. is now a net energy exporter, and the U.S. economy has become less energy intensive, Lachman said.
"In the 1970s, a $10 increase in the price of oil would have pushed inflation up by between 0.5 and 1.0 percentage points, today the general estimates fall in the 0.2 to 0.3 percentage point range," he said.
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