Introduction
As September draws to a close, oil futures are inching closer to the significant $100-a-barrel mark. This rapid surge in prices has created shockwaves in global financial markets, prompting industry experts to analyze the main drivers behind this unprecedented rally.
Saudi Arabia’s Production Cut
At the forefront of this extraordinary surge is Saudi Arabia’s decisive action. In June, the country announced a unilateral cut in oil production by 1 million barrels per day. This initial cut, which was later extended through August and September, received high praise for its strategic execution. Robert Yawger, Executive Director for Energy Futures at Mizuho Securities, highlights Saudi Arabia’s production cut as the primary catalyst for the market rally.
Lack of Supply in the U.S.
Alarming concerns are arising from tight domestic supplies in the United States. The Energy Information Administration reported that crude inventories recently fell to their lowest level since December 2nd, standing at 413.3 million barrels. However, the focus is primarily on Cushing, Oklahoma – the delivery hub for New York Mercantile Exchange oil futures. Cushing’s storage levels have dropped to 21.958 million barrels, the lowest since July 2022. With storage levels on the verge of dropping below 20 million barrels for the first time since 2014, there are apprehensions about potential operational difficulties at the largest U.S. storage facility due to pressure loss if drawdowns persist.
Profits from Refined Products
A significant driving force propelling these escalating prices is the substantial profits gained from refined products. Industry experts closely monitor the “crack spread,” which measures the price difference between a barrel of crude oil and its refined products like gasoline and diesel fuel. Higher crack spreads indicate increased demand from refiners who seek to convert crude into products. Consequently, these profits have played a crucial role in facilitating the upward trend in oil prices.
In conclusion, multiple factors contribute to the current surge in oil futures, with Saudi Arabia’s production cut, dwindling domestic supplies, and profitable refined products standing out as primary drivers. As the market inches closer to the $100-a-barrel threshold, global financial markets remain on high alert, closely monitoring the stability and potential implications of these rising oil prices.
The Rise and Fall of the Heating-Oil Crack Spread
The heating-oil crack spread reached a remarkable nine-month high of $58.17 per barrel on August 25th, and it remained consistently above $50 per barrel well into mid-September, according to industry experts. However, recent developments have shown that while crude prices have remained strong, heating oil products have struggled to keep up. In fact, the heating oil crack fell to a two-month low of $40.595 per barrel just this past Wednesday.
Speculators Drive the Market
It seems that speculators are flocking to crude oil, as evidenced by the latest government data on commitments of traders. As of September 19th, there were a whopping 294,396 net long speculative contracts. Analysts predict that this number will only continue to rise in the coming weeks.
The Potential Reversal
Of course, extreme speculative positions can often be a sign of an impending reversal in the market. If speculators are forced to liquidate their positions, this could potentially lead to a sharp change in direction. It’s important to keep an eye on these developments as they unfold.
A Momentary Pause
Although the oil rally experienced a brief pause on Thursday, it’s worth noting that West Texas International crude for November delivery reached an impressive high of $95.03 per barrel earlier in the week. This marked the highest level since late August 2022. Additionally, Brent crude, the global benchmark, briefly surpassed $97 per barrel on Thursday morning after closing at its highest level since November.
Implications on the Market
The rally in crude oil prices has had significant effects on other sectors, including inflation and currency markets. This, in turn, has contributed to increased volatility in stocks, with major U.S. benchmarks like the S&P 500 and the Dow Jones Industrial Average struggling to maintain positive momentum this September.
As we continue to monitor the fluctuations in the oil market, it’s clear that both crude oil and heating oil products are in for an exciting and unpredictable ride. Stay tuned for further updates on this ever-evolving situation.