WTI decline of more than $3 led by Saudi Arabia’s shrinking official selling prices
It’s a complicated day for oil, with multiple bearish factors stacking up over the long weekend.
Chief among the bearish forces is a drop in Saudi Arabia’s official selling prices (OSP) for October. The Kingdom’s SOP for OSP is to lower its offer price relative to other benchmarks to stir up buying interest. Over the weekend, these OSPs were reset by region; in Asia, Saudi’s Arab Light crude versus Oman/Dubai was lowered by $1.40/Bbl, per Platts. AEGIS notes such an aggressive change in sales price could set off a chain of offers from competing crudes.
Weak equities markets (the S&P 500 index was down near 2% as of this writing) are undoubtedly adding to the pressure on crude. It’s risk-off across the board. Many may scream “demand!” not knowing the root cause. Whether its concern about the pace of economic recovery or just simple correction, the result is widespread selling of assets related to price inflation.
Last, the U.S. dollar is gaining in value after sudden losses during August. The formerly weakening dollar was likely supporting oil prices for a month before reversing course last week. Our recent commentary here explains the effect of the USD.
We remain concerned about OPEC’s (mostly Saudi Arabia) choices regarding how fast the cartel returns it’s 6-9 MMBbl/d of spare capacity in the next year. Rhetoric from OPEC has suggested a return of supply as demand recovers.
If OPEC estimates demand recovery incorrectly, it risks oversupplying the market and suddenly yanking back prices in an attempt to solve the spot-market oversupply.
As a result, AEGIS still maintains recommendations to use swaps as the default hedging instrument through mid-2021, possibly to the end of that year. Beyond, in 2022, demand is likely to catch up with supply, and the market may become tight, with supply underserving demand.
See our ongoing coverage and recommendations here in our most recent Factor Matrix.
For more on the global supply-demand balance and our thoughts on the “inflection point,” consult this post.