Crude Prices Settle Higher as the Dollar Slips and Stocks Rally

Crude oil and gasoline prices closed higher on Friday, supported by a weaker dollar and broader economic optimism, but faced significant bearish pressure from an anticipated global supply glut. OPEC+ plans to fast-track its production increases by approximately 1.66 million bpd, while the IEA projects a record 3.33 million bpd surplus for next year, further exacerbated by resumed Iraqi-Kurdish exports and reduced Indian demand. Geopolitical tensions in Ukraine, including attacks on Russian oil infrastructure and potential sanctions, offer some counter-balancing support by threatening global supply.

Analysis

November WTI crude oil (CLX25) on Friday closed up +0.40 (+0.66%), and November RBOB gasoline (RBX25) closed up +0.0098 (+0.53%). Crude oil and gasoline prices settled higher on Friday as a weaker dollar prompted some short covering in energy futures. Also, Friday's rally in the S&P 500 to a new all-time high shows confidence in the economic outlook that is supportive of energy demand. Gains in crude were limited due to concerns over a global supply glut, as OPEC+ is set to increase its crude production levels. On Thursday, crude oil tumbled to a 4-month nearest-futures low and gasoline sank to a 4.5-year low due to the outlook for larger OPEC+ crude production. According to an OPEC delegate, the group is expected to discuss on Sunday fast-tracking its latest round of supply hikes in three monthly installments of approximately 500,000 bpd, starting in November, to return the remainder of a 1.66 million bpd supply cut. OPEC+ is boosting output to reverse the 2-year-long production cut and restore a total of 2.2 million bpd of production. OPEC's September crude production rose by 400,000 bpd to 29.05 million bpd, the highest in 2.5 years. Crude prices are also under pressure as the International Energy Agency (IEA) projects the global oil market is headed for a record surplus next year of 3.33 million bpd, about 360,000 bpd more than they projected a month ago, as OPEC+ continues to revive production. The outlook for higher crude production in Iraq is also expected to boost global oil supplies, which is bearish for crude prices. Iraq last Monday announced that it had reached an agreement with the regional government of Kurdistan to resume oil exports from the Kurdish region via a pipeline to Turkey, which had been halted for the past two years due to a payment dispute. Iraqi Foreign Minister Hussein said Thursday that the resumption of crude exports could add 500,000 bpd of fresh oil supplies to global markets. Reduced crude demand from India, the world's third largest crude oil importer, is negative for oil price after India's Aug crude imports fell -2.9% y/y to 19.6 MMT. An increase in crude oil held worldwide on tankers is bearish for oil prices. Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least seven days rose by +3.7% w/w to 81.95 million bbl in the week ended September 26. Crude prices have support from concerns that the ongoing war in Ukraine could lead to additional sanctions on Russian energy exports, reducing global oil supplies. President Trump said he thought NATO nations should shoot down Russian aircraft that violated their airspace and reiterated the need for Europe to cut its energy purchases from Russia. The US proposed that the G7 allies impose tariffs as high as 100% on China and India for their purchases of Russian oil in an effort to convince Russia to end the war in Ukraine. Ukraine has stepped up its attacks on Russian refineries and oil infrastructure, which is bullish for crude prices as it curbs Russian crude exports and tightens global oil supplies. Ukrainian drone and missile attacks on Russian refineries have curbed Russia's total refined-product flows to 1.94 million bpd in the first fifteen days of September, the lowest monthly average in over 3.25 years. Wednesday's EIA report showed that (1) US crude oil inventories as of September 26 were -4.1% below the seasonal 5-year average, (2) gasoline inventories were -0.2% below the seasonal 5-year average, and (3) distillate inventories were -5.5% below the 5-year seasonal average. US crude oil production in the week ending September 26 was unchanged w/w at 13.505 million bpd, modestly below the record high of 13.631 million bpd posted in the week of 12/6/2024. Baker Hughes reported Friday that the number of active US oil rigs in the week ending October 3 fell by -2 to 422 rigs, modestly above the 4-year low of 410 rigs from August 1. Over the past 2.5 years, the number of US oil rigs has fallen sharply from the 5.5-year high of 627 rigs reported in December 2022. On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. The crude oil market is exhibiting significant bearish pressure from a looming supply glut, despite a minor short-covering rally driven by a weaker dollar and broader equity market optimism. The core of this bearish sentiment stems from OPEC+'s plan to fast-track the return of 1.66 million barrels per day (bpd) to the market, building on September's production which already reached a 2.5-year high of 29.05 million bpd. This is amplified by the International Energy Agency's (IEA) forecast of a record 3.33 million bpd surplus for the upcoming year. Additional supply-side headwinds include the potential return of 500,000 bpd from Iraq's Kurdish region and signs of weakening demand, evidenced by a 2.9% year-over-year decline in crude imports by India. Counterbalancing these fundamentals are significant geopolitical risks, primarily from the war in Ukraine. Ukrainian attacks have already curbed Russian refined product flows to a 3.25-year low, and the prospect of further G7 sanctions on Russian oil purchasers provides a floor for prices. US inventory data offers modest support, with crude, gasoline, and distillate stocks all sitting below their five-year seasonal averages, while a declining US oil rig count suggests a potential future slowdown in domestic production growth.

Key Decisions for Investors

• Given the substantial projected supply increases from OPEC+ and the record surplus forecasted by the IEA, investors should remain cautious on long-term bullish positions as these fundamental pressures are likely to cap significant price rallies.
• Monitor geopolitical developments in the Russia-Ukraine conflict closely, as attacks on energy infrastructure or new sanctions represent the primary bullish catalysts capable of causing sharp, albeit potentially short-lived, price spikes.
• Pay close attention to weekly US EIA inventory reports, as continued draws or stocks falling further below the 5-year average could provide near-term price support and challenge the dominant bearish narrative.
• The decline in the Baker Hughes rig count to a level modestly above its 4-year low suggests a potential tapering of future U.S. production growth, a long-term supportive factor that could tighten balances if the trend continues.