Oil Prices Experience Slight Decline

Oil prices have declined slightly in recent weeks, with Brent crude near $75 per barrel. Citi Research views this as a potential short-term buying opportunity, even amidst easing geopolitical tensions. They identify multiple factors that could lead to a rebound in oil prices, possibly reaching the $80s per barrel.

Factors Influencing Oil Prices

The recent decline in Brent prices can be attributed to geopolitical developments, particularly in Gaza, where a potential cease-fire is reducing immediate risks. Additionally, China’s economic slowdown and weakened industrial production contribute to a cautious outlook on oil demand.

These dynamics have led to a reduction in the geopolitical risk premium and pressure from weak Chinese oil import data, alongside subdued middle distillate demand in the U.S.

Geopolitical Risks Remain

Despite reductions, Citi Research notes that geopolitical risks are far from eradicated. Possible weather-related disruptions during hurricane season and ongoing tensions in North Africa and the Middle East could support near-term oil prices.

Market Positioning and Data Insights

The current market positioning, which is historically short, suggests a rebound potential if Brent prices dip to the $75 level. Recent data from the Energy Information Administration (EIA) in the U.S. has shown mixed but somewhat bullish signals for crude. Crude oil inventories fell by 4.6 million barrels to 426 million barrels, exceeding the expected draw of 1.9 million barrels.

Refinery runs slightly increased, with gross crude exports and imports rising, resulting in marginally higher net imports. Gasoline inventories decreased by 1.6 million barrels, aligning with broader inventory draw trends. Distillate inventories saw a notable drop of 3.3 million barrels, reinforcing a bullish outlook for crude, though jet fuel inventories rose slightly and ethanol stocks increased, painting a mixed picture for refined products.

Speculative Positioning

Speculative positioning in the ICE Brent complex struggled in August, showing a lack of enthusiasm on the upside. However, the ratio of Brent managed money (MM) gross longs to shorts has improved to 1.6x, recovering from pandemic-era lows.

Technically, the 200-day moving average of Brent at $82.5 per barrel serves as a strong resistance level, while support remains around $75 per barrel. This setup could further encourage buying if Brent approaches the lower end of this range.

OPEC+ Outlook

Looking forward, Citi Research anticipates tough decisions for OPEC+ in the upcoming months. While they are expected to ease production cuts in October, additional measures might be considered to stabilize the market if Brent prices continue to decline toward the low $70s. The group is likely to defend the $70 per barrel level with the highest projected global oil demand growth of 2.1 million barrels per day.

Analysts noted that potential refinery run cuts could be anticipated as gasoil cracks have dropped, skimming margins for refineries. Refinery margins face pressure, especially as gasoil cracks fell below $17 per barrel in recent sessions, which could lead to cuts amid maintenance in Europe and disruptions in Russian exports.

Nonetheless, Citi Research expects a possible recovery in gasoil cracks as winter approaches, potentially returning to the $20 per barrel range.