J.P. Morgan sees the oil market moving back into surplus
Oil prices rebounded Thursday, recovering part of the previous session’s deep losses as traders assessed the outlook for U.S.-Iran relations after the U.S. midterm elections and weighed recovering oil supplies from the Middle East. Front-month Brent crude for January delivery settled up 3.9% at $98.29 a barrel, and West Texas Intermediate for December rose 2.7% to $90.52 a barrel.
Both benchmarks fell more than 8% on Wednesday after Democrats won control of Congress in the midterm elections, raising expectations that the outcome could increase pressure on President Trump to pursue a diplomatic resolution to the Iran conflict.
“It’s no surprise that there was such a big selloff with that sort of result in the U.S.,” said Ajay Parmar, director of energy and refining at energy intelligence firm ICIS. “There’s a higher likelihood of a deal now in the coming weeks than there was prior to this election.”
Parmar said views diverge on how Trump responds from here: some in the market think the president could decide he has nothing to lose and act to “finish the job,” while others see him moving to wrap up the conflict quickly after acknowledging the war was behind Republican election losses. With Iran unable to export any oil because of the U.S. blockade, Parmar said he feels Iran wants to come to some sort of a deal and that things will probably abate going forward.
The premium for near-term Brent crude deliveries has narrowed sharply as traders price in a greater possibility of a diplomatic resolution to the Middle East conflict, according to MUFG. The spread between the nearest Brent futures contracts has fallen below $2.50 a barrel from more than $5 in mid-October, a shift that suggests concerns about immediate supply shortages have eased.
The Democratic victory could make further military escalation politically more costly for Trump, while increasing pressure to reach an agreement that would restore energy shipments through the Strait of Hormuz, according to Rystad Energy. The consultancy noted, however, that the incoming Congress does not take office until Jan. 3, leaving the possibility of renewed military action before then.
“The midterm election results demonstrated the unpopularity of doing so, but it remains to be seen how these next two months will play out, keeping some level of uncertainty present,” StoneX senior commodities economist Mike Castle said in a note.
Meanwhile, the global oil market is moving back into surplus as Middle Eastern exports recover and demand weakens, according to J.P. Morgan. The bank estimated that supply exceeded demand by 1.1 million barrels a day in September, with the surplus widening to 1.4 million barrels a day in October.
Middle Eastern oil exports recovered to around 20.7 million barrels a day in October from a low of 9.8 million barrels a day in March, J.P. Morgan said. The bank also estimated that global oil demand has declined by 3.3 million barrels a day since the conflict began, reflecting the impact of higher fuel prices and supply disruptions.
The export recovery has yet to fully restore regional energy flows, with security threats and elevated shipping costs continuing to complicate shipments through the Strait of Hormuz.
U.S. crude inventories fell by 865,000 barrels to 409.8 million barrels last week, according to data released Wednesday by the Energy Information Administration. Distillate inventories dropped by 3.6 million barrels to 99.3 million barrels, pointing to continued tightness in fuel markets.