US-Iran war may keep oil in broad $105-120/bbl range: Mirae Asset Sharekhan

Disclaimer: This article is written by Mohammed Imran, research analyst, Mirae Asset Sharekhan. Views expressed are his own. Readers' discretion is advised.

 

Global crude oil prices drifted higher through the week and headed for a third straight week of gains as markets prepared for the US midterm elections next week, following a fractured mandate in Israel's elections, which has also increased the risk to geopolitics as Netanyahu party appears to be the single largest party in Israel's elections. WTI prices are holding 12 per cent up in October and are higher by 77 per cent for the year. Supply disruption concerns have offset tentative diplomatic optimism. Escalating hostilities between Iran-backed Houthi forces in Yemen and Saudi Arabia are keeping a geopolitical risk premium intact and may continue to support oil prices.

 

 

Global oil fundamentals remain comparatively tight, with declining inventories providing underlying support even as refinery operations, margins and aviation demand show signs of moderation. Total crude and product inventories across tracked markets fell 1.4 per cent WoW, or 21.6mn barrels, to 1.539bn barrels in the week to October 16. More importantly, the deficit versus the five-year seasonal average widened sharply to 75.9 million barrels from 58.7 million barrels.

 

Global crude inventories

 

Crude inventories accounted for a significant portion of the tightening. While tracked land-based crude stocks were broadly unchanged at 533.2 million barrels, global floating crude inventory dropped 12.6 per cent WoW to 80.9mn barrels. Consequently, combined land and floating crude inventories declined 1.8 per cent to 614.1mn barrels, moving from a 5.3mn-barrel surplus to a 7.2mn-barrel deficit. The weekly US crude oil inventories fell by -1.9 million bbls, more than market expectations of a -1 million barrels decline and the fourth straight weekly drop.  Gasoline inventories rose +3.87 million barrels indicating that peak summer demand has passed and higher inflation is easing the consumer demand, while distillate inventories fell -1.46 million barrels.

 

Global petroleum product tightness

 

The lower refinery runs have kept the Product markets tight in past six months, the total tracked product inventories declined 1.1 per cent to 924.9mn barrels, with their seasonal deficit widening to 68.7mn barrels. Gasoline and light-distillate stocks fell 2.6 per cent to 234.4mn barrels, while middle-distillate inventories eased 0.7 per cent to 193.1mn barrels. The demand and refining picture, however, is less uniformly bullish. US refinery utilization slipped to 93.4 per cent, Japan fell to 76.4 per cent, while Chinese state-owned refinery runs edged up to 73.6 per cent. In Singapore, refining margins weakened, with Dubai margins falling to $26.54/bbl from $29.37/bbl, although Asian and European jet and diesel cracks remained elevated.

 

Meanwhile, global commercial aviation jet-fuel demand is projected to decline 1.2 per cent WoW to 6.89mn bpd and remains 2 per cent below year-ago levels. Thus, softer aviation demand and refining economics are tempering an otherwise supportive physical backdrop dominated by rapidly declining floating crude and unusually low global oil inventories.

 

Outlook

 

Brent, measured as the average of the two nearest futures, closed last week at $112.5, only the seventh such close in more than 238 days of war. History suggests the $110–125 "emergency" band rarely holds for long, and deal rumors could surface at any moment. The exception would be a serious  escalation, which is widely expected after the US midterms, that could push prices into uncharted territory above $125, though we doubt such levels would last beyond four weeks. Overall standoff would see broader range of Brent range of $105-120, a deal could unwind risk and Brent could moderate to, a $95–110 "crunch" remains the base case. A second MoU would erase the geopolitical premium almost instantly, likely triggering a near-vertical drop from emergency levels into the $80–95 range.