To The Moon

Since late September, there has been a striking divergence in the commodity markets: gold has repeatedly hit new highs, while crude oil prices have steadily declined. This contrast reflects underlying differences in market fundamentals and investor sentiment. Notably, NYMEX WTI crude oil futures briefly fell below $57 per barrel, and ICE Brent futures fell below $60 per barrel, even as gold maintained a record-high trajectory. Understanding the reasons behind this “oil-gold” divergence is crucial for market participants.

From a supply and demand perspective, global crude oil production is undeniably increasing. OPEC has abandoned previous voluntary production cuts in favor of market share gains, while the United States and other non-OPEC countries also continue to ramp up output. Moreover, geopolitical risks have eased, with Iran and Russia expected to gradually resume exports. These factors have contributed to rising global oil inventories, while demand growth remains weak amid a slowing global economy and the ongoing energy transition that reduces traditional fossil fuel usage. In this environment, crude prices only receive limited support from anticipated interest rate cuts by the Federal Reserve, which is insufficient to halt the downward trend.

Looking deeper into supply, OPEC's output is on the rise. Forecasts suggest that in October the cartel, led by Saudi Arabia, will boost supply to 34.69 million barrels per day—the highest level since December 2018. Early October announcements confirm a planned increase of 137,000 barrels per day in November, matching October's hike and signaling a phased exit from their 2023 output limits set during post-Ukraine war price adjustments. In the U.S., production hit a new record with weekly output reaching 13.64 million barrels per day in early October, despite a drop in active drilling rigs compared to last year. Efficiency gains and larger well sizes have enabled producers to maintain high output levels with fewer rigs. Additionally, non-OPEC+ producers such as Brazil, Guyana, and Canada are expanding their production further intensifying supply-side pressure.

Geopolitical developments have also softened market tensions. The recent agreement between Israel's Prime Minister and U.S. President Donald Trump on a “20-point plan” to end the Gaza conflict reduces the “war premium” embedded in oil prices. Given that the Middle East supplies around one-third of global crude, a sustained end to nearly two years of conflict could remove significant upward price risk. Iraq’s northern oil pipeline to Turkey has resumed operations after a two-year halt, improving export flows. Meanwhile, despite stalled U.S.-Russia talks, European leaders issued a joint statement supporting an immediate ceasefire in Ukraine, reinforcing the potential for de-escalation. These developments reduce short-term bullish expectations for oil prices, especially given the risk of renewed OPEC+ production increases.

On the demand side, oil consumption weakened in September compared to the summer peak. This decline results from slower economic growth and a structural shift to cleaner energy, which diminishes demand for traditional fuels. Refinery margins remained healthy, but utilization rates slipped worldwide: U.S. refinery activity fell from 95.5% in August to 93.2% in September, and Europe’s 16-country refinery utilization dropped from 86.9% to 82.4%. In China, crude imports showed only modest growth of 2.6% year-over-year in the first three quarters, a significant slowdown compared with 14.6% growth in 2023. Private regional refineries in Shandong province saw their utilization rate fall to 50.3% in mid-October, down from a September peak of 53.5% and below last year's level. Inventory data corroborates weak demand: OECD commercial oil stocks increased by 340,000 barrels per day year-to-date (a quarter of global inventory growth), with projections indicating further rises. U.S. crude inventories rose for a third consecutive week to 423.79 million barrels, while refinery processing volumes declined by 1.2 million barrels per day and utilization rates fell by 6.7 percentage points to 85.7%. The International Energy Agency reported a 340,000 barrel per day increase in floating storage in September—the largest since the pandemic began—adding further supply pressure.

The only significant positive factor for oil prices recently has been the prospect of Fed rate cuts. On October 20, U.S. stocks rallied sharply, gold reached record highs, bonds gained, and even the dollar index edged up—a rare occurrence indicating heightened risk-off sentiment. The VIX volatility index remained above 20 for several days, highlighting market fears. The equity rally reflects speculation that the Fed will lower rates in October and December, partly due to delayed economic data amid a government shutdown and concerns about rising unemployment. Liquidity worries in dollar markets may also force the Fed to not only cut rates but end its quantitative tightening program. The rapid drop in two-year Treasury yields shows investors shifting focus from inflation to credit risks.

In summary, the primary tension in today's oil market is the supply surge driven by producers prioritizing market share over price stabilization, coupled with subdued demand due to slowing economies and accelerating energy transitions. This supply-demand imbalance suggests limited upside for crude prices in the near term. Market participants should remain vigilant toward downside risk and consider risk-management tools such as micro WTI futures on the CME or crude futures and options on the Shanghai International Energy Exchange to hedge exposure effectively.

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