Oil prices drop to their lowest level in more than a week as OPEC lowers demand growth projections.

Oct 13, 2022
VOT Research Desk

Market Insights and Analysis

ECONOMETRIC VIEW

After OPEC lowers its forecast for the growth of petroleum demand this year and in 2023, oil prices decline and record their lowest closing level in just over a week.

EIA lowers its predictions for WTI, Brent, and natural gas prices in 2022 and 2023

After the Organization of the Petroleum Exporting Countries reduced its outlook for growth in crude demand in 2022 and 2023 in response to rising economic concerns, oil futures settled at their lowest price in just over a week on Wednesday.

Traders also took in a reading of the U.S. producer price index that was hotter than expected, which was seen as strengthening expectations for aggressive interest rate increases from the Federal Reserve.

After posting a loss of nearly 2% on Tuesday, price action for West Texas Intermediate crude for November delivery CL.1, 0.68% CLX22, 0.68% CL00, 0.68% fell $2.08, or 2.3%, to settle at $87.27 a barrel on the New York Mercantile Exchange.

The global benchmark, December Brent crude BRN00, 0.83 percent BRNZ22, 0.87 percent, was down $1.84, or nearly 2 percent, to $92.45 a barrel on ICE Futures Europe. Brent and WTI prices fell to their lowest levels since October 4.

On Nymex, gasoline RBX22, 0.34 percent increased 0.1 percent to $2.6303 per gallon in November, while heating oil HOX22, -0.7 percent increased nearly 0.1 percent to $3.9328 per gallon.

Natural gas prices in November decreased by 2.4% to $6.435 per million British thermal units, or NGX22.

Market drivers OPEC’s monthly report, which was released on Wednesday, predicted that oil demand would rise by 2.64 million barrels per day (mb/d) this year, down from 3.1 mb/d in its report from September. The forecast for growth in 2023 is now 2.34 mb/d, down from 2.7 mb/d last month.

The cartel and its Russian-led allies agreed last week to cut production by 2 million barrels per day beginning in November. This caused crude futures to rise sharply, enraged the Biden administration, and strained relations between the United States and Saudi Arabia, OPEC’s de facto leader. The revised estimates follow this agreement.

Due to the fact that a number of producers were already pumping below their individual targets, the reduction is anticipated to result in a reduction of approximately half of the 2 million barrels per day figure. Given that there were still signs of a lack of physical supplies, the cut was still regarded as significant.

in a market update that ongoing concerns about future global demand and the gloomy economic outlook from the International Monetary Fund are “raising the possibility that supply issues will be less of an issue than demand destruction.

Due to Monday’s federal holiday, the Energy Information Administration will publish its weekly U.S. petroleum inventory report on Thursday morning, a day later than usual.

S&P Global Commodity Insights polled analysts and predicted a 2.2 million barrel increase in crude supply, a 2.1 million barrel decrease in gasoline inventory, and a 2.3 million barrel decrease in distillates inventory.

The EIA reduced its WTI, Brent, and U.S. benchmark natural-gas price forecasts for 2022 and 2023 in its monthly Short-term Energy Outlook published on Wednesday.

The EIA expects WTI prices to average $88.58 per barrel in 2023, down 2.6% from the previous forecast, and WTI prices to average 95.74 per barrel in 2022, down 2.4% from the September forecast. Additionally, the EIA reduced its expectations for Brent prices to $94.58 in 2023 and $102.09 in 2022, a decrease of 2% and 2.4 percent, respectively

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It predicted that natural gas prices in the United States would fall by 6.6% this year to an average of $6.88 per million Btus and by 3.9% next year to $5.77.

In its Winter Fuels Outlook, which was published as part of the Short-term Energy Outlook report, the EIA predicted that households in the United States that primarily heat their homes with natural gas will likely spend an average of $931 this winter, from October to March, which is an increase of 28% from the amount they spent last winter.

According to the EIA’s Winter Fuels Outlook report, both higher anticipated prices and consumption are to blame for the rise in natural gas expenditures.

In the Northeast, households that primarily use heating oil will spend an average of $2,354, up 27% from last winter.

In order to predict or hedge against downward movement, put option buyers dominated the U.S. oil options market. This may occur for a number of reasons, such as concern over reduced demand or because buying those options at a discount made sense for oil firms to hedge against potential losses.

Data from CME Group showed that trading volumes for U.S. crude futures options and calls for November delivery increased by almost 40% from Tuesday to Wednesday, the day of the OPEC+ meeting.

For the November contract of U.S. crude oil, put volume increased to 25,615 on Wednesday, 10,922 more than the previous session, according to CME Group. For the other hand, that day saw the acquisition of 19,473 call options, which are wagers on a higher price.

After the OPEC decision, the put-to-call skew actually shifted in favor of the put,

According to CME Group data, volume in puts on Thursday and Friday was 15,579 and 25,771 respectively, while volume in calls was 16,087 and 42,291 respectively.

After the White House hinted last week that it was reconsidering its ties with Saudi Arabia and as it looks for ways to lessen OPEC’s stranglehold over oil prices, trading soared on Friday.

Friday saw a widening of oil spreads in the futures market, with shorter-term contracts rising more quickly than longer-term contracts. That indicates fresh concerns about the current supply, which is more bullish.

The difference between the price of international benchmark Brent expiring in December 2022 and December 2023 increased by more than 12% on Friday to reach above $13 per barrel, its biggest level since June.

Crude WTI Pivots (Daily)

Exponential SMA (Daily)