Oil markets are hesitant to trade with conviction as they await the start of Trump’s second term.

OPEC+ has delayed unwinding production cuts until the end of Q1 2025 due to pessimistic market sentiment.

Natural gas prices have dipped due to forecasts of milder weather.

With nearly a month since U.S. President-elect Donald Trump won a second term in the Oval Office, oil markets have been struggling to find direction despite event risk remaining high, particularly in the Middle East. According to commodity analysts at Standard Chartered, the market’s apparent hesitation to trade a view with any conviction has intensified the notion that oil markets seem content to wait for Trump to take office. Volatility has fallen sharply, with the 30-day front-month Brent realized annualized volatility sinking to a1 6-week low of 25.1% at settlement on 2 December. This volatility reading falls in the lower 30% tail of the distribution of volatility over the past 10 years.

The ongoing ceasefire in Lebanon appears fragile, while the rekindling of the Syrian civil war indicates that the balance of power in the region has been disturbed. On Monday, Hezbollah fired into a disputed border zone held by Israel, with Lebanon’s parliament speaker claiming that Israel has committed 54 breaches of the ceasefire.

StanChart has reiterated its earlier prediction that OPEC+ tapering mechanism is likely to play the biggest role in dictating the oil price trajectory. The analysts note that the OPEC+ Joint Ministerial Monitoring Committee (JMMC) and the broader OPEC+ Ministerial meeting originally scheduled for 1 December was moved to today, with the more administrative OPEC meeting set for 10 December.

According to StanChart, the key discussions were those between Saudi Arabia, Russia, Iraq, Kuwait, the UAE, Kazakhstan, Algeria, and Oman, the eight OPEC+ nations that announced additional voluntary output cuts in April and November 2023. StanChart correctly predicted that, given current negative market sentiment and an overly pessimistic market view of 2025 balances, tactically the best choice for ministers was to delay any unwinding of voluntary cuts to the end of Q1 and perhaps even further out. StanChart notes that much of the recent burst of oil diplomacy has centered on Iraq and its commitment to both reduce output to target and to pay back past overproduction.

Bloomberg estimates that Iraqi crude oil output fell to a three-year low of 4.06 million barrels per day (mb/d) in November; good for a 70 thousand barrels per day (kb/d) m/m decline;, 260 kb/d below August and 420 kb/d lower y/y, but still 60 kb/d above target (including voluntary cuts).

According to StanChart, much of the negative sentiment that has dominated oil markets over the past couple of months can be chalked up to misapprehensions about the tapering mechanism for the voluntary cuts made by eight OPEC+ countries. Many traders are worried that the balance of oil demand growth and non-OPEC+ supply growth might not offset the scale of restored OPEC+output, leaving oil markets oversupplied. However, the experts have pointed out that this assumption flies in the face of continued reassurances from OPEC+ members that the tapering would be fully dependent on market conditions rather than being automatic. 

Trader focus has been on the question of how many barrels could be returned before a surplus emerged; however, positioning and price dynamics imply that the answer to that question is zero. 

In a November 3 press release, OPEC announced that output increases would be postponed by a month until the start of 2025. StanChart says the delayed return of more barrels to the market does not necessarily mean that OPEC felt the physical market could not absorb the oil, but rather reflects its awareness that extremely pessimistic 2025 oil balance predictions have viewed the tapering through that lens. StanChart says the latest announcement by OPEC strengthens the case that the pace of tapering will be market-dependent and not automatic as traders fear. This realization is likely to have driven the latest oil price rally.

Gas Rally Hits Pause

U.S. natural gas futures dropped to $3.00/MMBtu on Tuesday, their lowest in over a week, after surging 20% in November. Gas prices have declined amid forecasts of milder weather in mid-December, following a brief cold spell that had driven earlier gains. Utilities have stopped drawing heavily from storage, despite colder-than-usual weather recently boosting consumption. Meanwhile, U.S. gas production clocked in at a robust 101.5 billion cubic feet per day in November, but below last year’s peak of 105.3 bcfd. 

Meanwhile, European natural gas futures slipped to €47.6 per megawatt-hour, retreating from a 13-month high of €49 earlier this week, as forecasts pointed to warmer weather while withdrawals slowed down. EU gas inventory draws have moderated over the past week: According to Gas Infrastructure Europe (GIE) data, inventories stood at 100.06 billion cubic metres (bcm) on 1 December; the w/w draw clocking in at 2.96 bcm, a significant deceleration from the previous week’s draw of 3.58 bcm. Last week’s withdrawal clip was also less than both last year’s draw of 3.65 bcm and the five-year average of 3.09 bcm.

Gas inventories are at 85.2% of capacity, 10.54 bcm lower y/y but just 0.36 bcm below the five-year average.

By Alex Kimani, Oilprice.com  – Dec 06, 2024