Two days ago, benchmark crude oil futures fell by their largest one-day margin in more than two years after Israel launched limited retaliatory attacks on Iran but largely avoided energy facilities, thus easing fears of disruptions to global supplies. Israel mainly bombed air defense systems and missile production sites in three Iranian provinces, with analysts saying the lack of strikes on oil infrastructure or nuclear facilities leaves the door open for both sides to de-escalate the conflict.
Meanwhile, Iran’s Supreme Leader Ayatollah Ali Khamenei toned down the war rhetoric by refraining from talks about immediate retaliation.
However, commodity analysts at Standard Chartered have taken a more nuanced view of the situation.
Whereas energy infrastructure was not a direct target in the latest tranche of Israeli missile strikes on Iran, the country’s oil and gas facilities did not emerge from the attacks entirely unscathed.
Three days ago, the Guardian reported that Israel used precision air and drone strikes to principally target air defense systems protecting crucial oil and gas facilities, as well as military sites linked to Tehran’s nuclear programme and ballistic missile production.
Some of the targeted air defense systems include the Abadan oil refinery, the Bandar Imam Khomeini petrochemical complex, the gasfield Tange Bijar, and the Bandar port in the south of the country. Overall, Israeli media reported about 20 hits. StanChart notes that damage to air defenses on Iran’s energy infrastructure has increased their vulnerability to future attack, a development that the market appears to be overlooking, or at least underappreciating. Related: U.S. Governors Demand Power Price Overhaul As Costs Balloon 10 Fold
That said, oil prices have pared back some of Monday’s heavy losses, with Brent crude for December delivery up 2.1% to trade at $72.50 per barrel at 13.00 pm ET in Wednesday’s session while the corresponding WTI crude contract gained 2.0% to change hands at $68.62 per barrel. The latest oil price rally comes after the U.S. Energy Information Administration reported inventory draws in gasoline and middle distillates for the week to October 25.
Gasoline stocks fell by 2.7 million barrels, with production at an average of 9.7 million barrels daily compared with an inventory build of 900,000 barrels for the previous week, when production stood at an average of 10 million barrels daily. Meanwhile, in middle distillates, EIA estimated an inventory decline of 1 million barrels, with production averaging 4.9 million barrels daily compared with a stock draw of 1.1 million barrels for the previous week when production stood at an average of 5 million barrels daily.
Last week, StanChart reported that global oil demand hit an all-time high of 103.79 million barrels per day (mb/d) in August, an upwards surprise of about 450 thousand barrels per day (kb/d) above their (pre-JODI data release) forecast. August becomes the third successive month in which a new all-time demand high has been set, with StanChart working out that demand growth clocked in at 1.32 mb/d in August.
Whereas this is lower demand growth than in all other post-pandemic Augusts, it can hardly be considered weak. StanChart has reported that the largest demand gains in August came from Korea (219 kb/d), Italy (185 kb/d), Saudi Arabia (117 kb/d), Türkey (99 kb/d) and Spain (88 kb/d). StanChart has now revised its 2024 global demand growth estimate upwards to 1.45 mb/d, thanks to the bigger-than-expected growth in August.
Europe Gas Price Rally
In yet another bullish development, Europe’s gas prices have seen an unexpected rally with markets remaining cautious due to recent supply outages in Norway and the U.S.
According to Gas Infrastructure Europe (GIE) data, EU gas inventories stood at 111.964 billion cubic meters (bcm) on 27 October, good for w/w increase of just 2 million cubic meters (mcm). According to StanChart, the latest trend over the past week has been of weekday withdrawals and weekend injections suggesting that the seasonal peak in inventories is either imminent or has already passed.
The prospect of an earlier-than-usual start to inventory withdrawals and (in contrast to the oil markets), the continuation of security concerns about the Middle East as well as Russian gas flows have combined to push European gas prices sharply higher. Front-month TTF reached a 10-month high of EUR 43.68 per megawatt-hour (MWh) intra-day on 26 October, with the contract settling at EUR 42.519/MWh on 28 October, good for a w/w increase of EUR 2.495/MWh (6.2%). StanChart notes that the YTD increase in both EU and UK gas prices now exceeds 30%, only slightly lagging the YTD performance of gold.
By Alex Kimani for Oilprice.com