A market overreaction?

This weekly report is an excerpt from our Short-Term Outlook service analysis, which covers a period of eight quarters and provides monthly forecasts for crude oil, natural gas, NGL, refined products, base petrochemicals and biofuels.  Contact John Paisie (+1-832-517-7544 or E-mail) for the detailed analysis or for more information about the Short Term Outlook.


The price of Brent crude ended the week at $97.92 after closing the previous week at $85.14. The price of WTI ended the week at $92.64 after closing the previous week $79.49.

Obviously, the biggest factor underlying the spike in the crude prices stems from the announcement by members of OPEC+ last Wednesday of an agreement to reduce their output target by 2 million b/d. The price increase was also supported by the EIA reporting drawdown in crude inventories and product inventories.

  • The EIA report also indicated that US crude inventories decreased by 1.36 million b/d. Furthermore, the level of inventories in the Strategic Petroleum Reserve (SPR) declined by 6.19 million barrels. Since the beginning of the year, inventories in the SPR have been drawn down by 177 million barrels. In comparison, commercial inventories have increased by only 11.35 million barrels.
  • Gasoline inventories in the US decreased by 4.73 million barrels and are now 21.30 million barrels less than for the same period in 2019. Diesel inventories decreased by 3.44 million barrels and are now 16.41 million barrels less than for the same period in 2019. Jet fuel decreased by 0.537 million barrels and are now 7.95 million barrels less than for the same period in 2019.

Even though the above are positive factors for oil prices, we think that the market overreacted to the recent news. While OPEC+ announced a reduction of 2 million b/d, the actual supply reduction will be around 1.0 million b/d because many members of OPEC+ have been struggling to meet production targets. With respect to inventory levels in the US, in comparison to the same period during 2021, crude inventories are greater by 8.32 million barrels, and are 3.63 million barrels above the level of 2019 and 19.52 million barrels more than in 2018.

Product inventories in the US, especially with respect to diesel fuel are low; however, demand growth has been tepid – and the US economy continues to show signs of weakness – as are the economies of Europe and China. Europe’s composite PMI (manufacturing and services) declined to 48.1 from 48.9 in August and is at the lowest level since April 2021. More troubling is that inflation continues to extremely high after reaching 10.0% in September. Restrictions pertaining to COVID-19 and the slowing economies of major trading partners continue to have a negative effect on China’s economy and recent economic surveys indicate that China’s service and manufacturing sectors contracted in September.  

For a complete forecast of energy prices, including crude oil and refined products, please refer to our Short-term Outlook.

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