Macro concerns vs commodity supply constraints | Article

The OPEC+ put

Oil prices came under pressure in September, with ICE Brent falling by almost 9% over the month and trading to the lowest levels since January. US dollar strength and central bank tightening have weighed on prices and clouded the demand outlook.

From a supply perspective, the oil market has been in a more comfortable position. Russian oil supply has held up better than most were expecting due to China and India stepping in to buy large volumes of discounted Russian crude oil. The demand picture has also been weaker than expected.

However, we believe there is a good floor for the market not too far below current levels. Firstly, the EU ban on Russian oil comes into force on 5 December, followed by a refined products ban on 5 February. This should eventually lead to a decline in Russian supply, as it is unlikely that China and India would be able to absorb significantly more Russian oil.

Secondly, US Strategic Petroleum Reserve releases are set to end later this year. If not extended, we could start to see large drawdowns in US commercial inventories, which are very visible to the market and could provide more support.

Potential OPEC+ intervention should also provide a good floor to the market. Already this week, OPEC+ announced a 2MMbbls/d supply cut through until the end of 2023. However, it is important to remember that given OPEC+  is cutting output from target production levels, the actual cut will be smaller given that most OPEC+ members are already producing well below their target levels. Our numbers suggest that the group’s paper cut of 2MMbbls/d will work out to an actual cut of around 1.1MMbbls/d.