Supply surplus in the first quarter of 2022!
The oil market was under pressure, as increasing production in line with COVID-19 increasing cases were the main reasons behind that.
In a bit larger perspective, in the past three weeks prices were falling after speculation that President Biden's administration wants to use the US Strategic Petroleum Reserve to cool prices and later fill them up with lower prices. Following that Cushing inventories at 27.33M barrels printed the lowest ever inventory level.
OPEC and its allies called OPEC+, in their last meeting, rejected the US request to increase the supply, which ended with talks about potentially increasing the US domestic supply. How technically it is possible is another question, however emotionally affected the markets. Even though if it was just a tool to push the OPEC members to increase the production, after UAE Energy Minister Suhail al-Mazrouei said Monday that all indications point to an oil supply surplus in the first quarter of 2022, it is so unlikely to see any changes in the upcoming meeting.
On the other hand, the number of new COVID-19 infected cases increased again, and some countries even started to use some sorts of restrictions, and it is another alarm that maybe we can see more restrictions in New Year holidays and it can decrease the travels and fuel demands.
From the demand perspective, while some investors and market participants were disappointed, with today's great industrial production data from China, the outlook changed a bit. And now, eyes turn to the US industrial production numbers before waiting for tomorrow's API report.
While transportation costs are increasing, inventories are lean and labor shortages are still alive, and we know already that Industrial output due to the harsh effects from Hurricane Ida, slipped 1.3% in September, with increasing retail sales in past weeks and an optimistic outlook that we have for retail sales and positive data for industrial production as a result, more demand for energy, can change the market attitude.
What we expect is that output to increase by 0.6% in October. Overall output likely will be still limited until having meaningful reorganization in supply chains, but elevated demand and the need to meet growing backlog suggest that production should continue to grow even if at a more modest pace.
In short, while technically everything is still about lower levels and technical indicators remain bearish, fundamental data and news can limit the bears and change the USOIL market direction above $78.
