It has been several weeks since oil price movements have given us any meaningful information about changes in fundamentals.

This was stated by analysts at Standard Chartered Bank, including Paul Horsnell, head of commodities research, in a report that Horsnell sent to Rigzone late Tuesday.

“A period of below-average prices, exacerbated by a magnetic storm of macroeconomic fears from above, has fed the algorithms that follow momentum,” the analysts explained in the report.

“This led to a prolonged price decline, exacerbated by a final bout of gamma hedging as banks sought to cover the risk from the options they had sold to producers,” they added.

“The negative feedback loop appears to have been amplified by an unusually high level of groupthink among hedge funds and other speculative streams, led by a (usually unquantified) market narrative of current or impending oversupply,” they continued.

“The overwhelming (and surprisingly uniform) pessimism among asset managers has pushed crude oil and oil products positioning to the most bearish extreme since the start of the global financial crisis (GFC) in 2008,” the analysts added.

In the report, representatives of Standard Chartered Bank explained that in such a turbulent market, it is almost impossible to derive a clear short-term directional signal from the fundamentals.

“Extreme positioning, groupthink and algorithmic trading strategies still generate far too much noise,” they warned.

“However, we believe there will be two key price drivers as the dislocations ease. First, there is no oversupply; in fact, September looks set to be the tightest month of the year due to seasonal demand strength and supply disruptions in Libya and the Gulf,” they added.

“Second, if OPEC+ producers meet their commitments, no oversupply is expected at least in the fourth quarter of 2024 and the first half of 2025. We believe that the actions of a small group of producers, particularly Iraq, will be the decisive factor for prices, but the market seems to be far from focusing on this,” they continued.

In a research note sent to Rigzone by the JPM Commodities Research team on Tuesday, JP Morgan analysts said they believe the market is currently overvaluing bearish drivers and stressed that they view global crude oil markets as tight today.

“Global crude oil inventories are below last year’s level, when Brent traded at $92, and at 4.42 billion barrels, the lowest since Kpler began collecting data in January 2017,” JP Morgan analysts said in the statement.

“Now both OECD crude oil and liquid oil stocks are below their five-year range and five-year average, and oil stocks at Cushing are severely depleted compared to the past 15 years,” they added.

“It is these withdrawals from oil inventories that influence our pricing model and show that the fair value of Brent today is $82 a barrel, $10 above the spot price,” they continued.

JP Morgan analysts said in their research note that they believe the price decline was due to “an expected oversupply in the market in 2025, as reflected in the curve structure, as well as concerns that OPEC and its allies will increase production into surplus territory.”

“To calm the market, key coalition members announced on September 5 that they will not increase production by 180,000 barrels per day in October and November. However, their longer-term plan to gradually revive 2.2 million barrels per day of idle stocks over 12 months remains in place, with the completion date pushed back by two months to December 2025,” they added.

“While the announcement stabilized the Brent price at just under $70, the decision to extend the supply curb for another two months could delay the challenge for OPEC into next year rather than solve it,” they warned.

In a macro update on the oil market from Rystad Energy, also sent to Rigzone on Tuesday, Svetlana Tretyakova, senior analyst at Rystad Energy, said that despite ongoing concerns about weak demand, global liquids and crude oil inventories are expected to remain tight until the end of 2024 and storage withdrawals are expected.

“Crude oil supplies are significantly constrained and the year-on-year change in crude and condensate supplies is expected to turn negative for the first time since 2020,” the update said.

“Global crude oil supplies are expected to decline by 220,000 barrels per day in 2024 compared to last year, mainly due to extended OPEC+ cuts, lower production in Libya and weaker performance by non-OPEC+ producers,” it said.

“OPEC+ members, including Saudi Arabia and Russia, are sticking to voluntary cuts of 2.2 million barrels per day through November 2024, with the possibility of further extensions. US oil supply growth was revised downward to 280,000 barrels per day, reflecting a decline in Bakken production and modest growth in the Permian,” it said.

“Libyan production has fallen sharply due to political unrest, while Brazilian production is expected to recover in the second half of the year and Nigeria’s production prospects are improving with steady growth,” it said.

“In addition, our preliminary estimate suggests that Hurricane Francine could result in a production loss of 1.8 million barrels in the Gulf of Mexico within two and a half days,” the update continued.

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