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The oil market experienced heightened volatility in October triggered by the increasing geopolitical risks in the Middle East over the past month. The increased volatility was driven by concerns related to potential supply disruptions, rather than actual changes in supply. So far, the Israel – Hamas conflict has not impacted oil supply from the region, as Israel is a minor oil producer with minimal influence on the market.
All in all, not much risk premium has been seen so far. Nonetheless, a significant risk for the market arises if the situation escalates and leads to supply disruptions from key regional producers, with Iran presenting the most obvious one.
Although U.S. sanctions against Iran are still in place, their enforcement has been relatively relaxed this year. As a result, Iranian oil supply has increased from approximately 2.5 million barrels per day at the beginning of the year to over 3 million barrels per day currently.
Throughout October WTI crude oil lost 15% as a lack of escalation in the Middle East removed worries about disruptions to supply in the oil-rich region, while demand outlook from the world’s top crude importer China remained uncertain.
Crude has mostly given up its war premium as the Middle East conflict hasn’t endangered supplies from the region, which is a source of about a third of the world’s oil. That has brought the attention back to demand concerns. Factory activity in China moved back into contraction last month, according to data released this week, while U.S. fuel demand remains low and crude stockpiles are rising. There are also signs of weakening diesel demand in some European countries such as Spain, the UK, Italy, and France.
Source: TradingView
Oil prices staged a small rebound on Thursday on the back of improved risk environment, as markets are building up hopes that the Fed is likely done with its rate hikes. Nonetheless, there are still some reservations around oil demand outlook this week as China’s PMI did not provide much conviction of a revival of the demand.
China’s manufacturing activity unexpectedly contracted in October. The official purchasing managers’ index (PMI) fell to 49.5 in October from 50.2, dropping back below the 50-point level which separates contraction from expansion. On the supply side, top oil exporter Saudi Arabia is expected to reconfirm an extension of its voluntary oil-output cut of 1 million barrels per day through December.
While at this stage there is no sign the latest pull back is reversing course, the weakening U.S. dollar along with the broader improvement in risk sentiment over the past few days is likely to help oil prices stabilise.
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If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
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The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
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