Saudi Arabia today reiterated today that it would keep its voluntary output cut in place through year end and OPEC’s monitoring committee said it wouldn’t recommend any policy changes. Those are headlines that should be bullish but oil is falling anyway, and in dramatic fashion.
WTI crude is down $3.35 to $85.88, which is the lowest since early September and nearly a $10 drop from last week’s highs.
A retest of the August highs near $85.00 is where oil might find support.
There isn’t a big fundamental story behind the drop, though there is talk about macroeconomic weakness on higher rates. That sounds like fitting the story to the price action to me.
Two things that were known coming into the month:
- October is the worst seasonal month for oil, something I highlighted
- Chinese import quotas were much lower for October (and China is on holiday this week)
Ultimately, I think this drop might be bullish for oil as it will strength OPEC’s resolve to tighten the market. There is still a material shortfall of 2-3 million barrels per day of oil right now and that will slowly pull barrels out of storage.
There are some legitimate worries about US gasoline usage but cracks falling will support demand and there is a heavy slate of refinery maintenance this month. In crude, the prompt month backwardation remains at $1.70, indicating ongoing tightness.
So the question is when to buy the dip. There’s an argument for $85 but bulls may want to wait and see how crude does at that level first.