Russia and Saudi Arabia stick to output cuts, oil prices gain on Monday 

Brent crude futures climbed above $85 per barrel on Monday, recovering some of the losses incurred in the previous session on Friday. The rebound followed a weekend announcement from major oil producers Saudi Arabia and Russia, who confirmed that they would maintain additional voluntary cuts in oil production until the end of the year. Saudi Arabia confirmed an extension of its 1 million barrel per day (bpd) production cut until December, while Russia committed to continuing its additional supply cut of 300,000 bpd from its crude exports.  

Futures for U.S. oil benchmark West Texas Intermediate (WTI) rose to around $81 per barrel. 

The U.S. House of Representatives passed a bill on Friday aimed at increasing sanctions on Iranian oil, focusing on foreign ports and refineries handling petroleum exports from Iran. Despite this, Brent prices had dropped by over 6% the previous week, reaching their lowest levels in a month as concerns over the Israel-Hamas war’s impact on oil supplies from the Middle East supply eased. 

This decline came after the leader of the Iran-backed militant group Hezbollah stated that they had no knowledge of the October 7 attack, reinforcing the belief that the war would likely remain localized. Factors cushioning these losses included a softer U.S. jobs report, which has led to speculation that the Federal Reserve might slow down its rate hikes, and a weaker U.S. dollar, making crude oil more affordable for importers. 

Oil demand: Weaker-than-expected China PMI data puts downward pressure on crude 

Despite the month-long Israel-Hamas war, hostilities have not spilled over into critical oil-producing regions in the Middle East. However, concerns about crude oil demand have resurfaced, with U.S. oil inventories increasing in the most recent data and factory activity in China, the largest crude oil importer, returning to contraction last month. Low liquidity has also exacerbated sharp price swings in U.S. oil. 

Markets have largely focused on “demand concerns as Chinese economic data has continued to come in weak and US inventories built,” Rebecca Babin, a senior energy trader at CIBC Private Wealth confirmed last Friday in a comment cited by Rigzone. Investors are also keeping a close eye on Saudi Arabia's official selling prices, as worries about contagion in the Middle East have diminished. 

In the options market, the demand for call options for both WTI and Brent crude has weakened as traders who initially invested in options to profit from a potential rally due to the conflict are now exiting the trade rapidly. Implied volatility for Brent and WTI has reached its lowest point in a month. 

ING commodity strategists Warren Patterson and Ewa Manthey gave more detail on the liquidated positions in Monday’s edition of the Commodities Feed: 

“The latest positioning data shows that money managers reduced their net long in NYMEX WTI by 60,795 lots over the last reporting week to 153,474 lots as of last Tuesday. 34,146 lots of this move was driven by fresh shorts entering the market, whilst there was obviously a fair amount of long liquidation. This is the smallest net long speculators have held in WTI since July. ICE Brent also saw a reduction in its net long with speculators selling 16,413 lots to leave them with a net long of 200,283 lots. This move was predominantly driven by longs liquidating.” 

While there are still risks of the Israel-Hamas conflict spreading, Hezbollah's Secretary General Hassan Nasrallah praised "martyrs" in Lebanon and called on Muslim countries to sever ties with Israel. In response, Israel stated that its troops had encircled Gaza City and that a ceasefire was not being considered. 

Oil price forecast: Middle East risk premium erodes 

Daniel Hynes, Senior Commodity Strategist at Melbourne-based ANZ Bank, wrote on Monday that while the risk premium from the Israel-Hamas war had all but eroded, markets remained aware of the risks of the conflict spreading further: 

“The risk premium associated with the geopolitical backdrop has completely vanished after two weeks of volatile prices. Prices fell further on Friday after the leader of the Iran-backed militant group Hezbollah said it didn’t know of the 7 October attack on Israel. This supports views that the conflict is likely to remain contained. Nevertheless, there are still risks it could spread.” 

Warren Patterson and Ewa Manthey added that markets would be closely watching for signs Saudi Arabia and Russia potentially extending the cuts into the first quarter of next year: 

“[…] what the market will be more interested in is if they extend these cuts into early 2024. Our oil balance shows that the market will be in surplus in 1Q24, which may be enough to convince the Saudis and Russians to continue with cuts through the seasonally weaker demand period of Q1.” 

At the time of writing on Monday, the continuous contract for ICE Brent crude traded at $85.70, up 0.95% on the day. A similar contract for WTI crude oil traded at $81.36, up 1.06% on the day, as per MarketWatch data. 

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