Missile "Accident" Prompts Return Of Demand Fears, Oil Prices Dip

But Julian Lee reminds colleagues that stockpiles are critically tight: File Image/Pixabay

With the Russian rocket hit on Poland deemed to be accidental rather than intentional, and a pipeline carrying Russian crude to Europe reported to have restarted, demand concerns once again gripped crude traders and caused another downturn in the commodity on Wednesday.

West Texas Intermediate for December delivery dropped $1.33 to settle at $85.59 per barrel, and Brent for January settlement fell $1 to settle at $92.86 per barrel.

The resumed hand wringing over demand was despite a U.S. government report showing large crude draws (5.4 million barrels last week) along with minimal builds in fuel inventories.

As for the Russian made missile that struck NATO-member Poland killing two people, Poland's president Andrzej Duda said the strike was an "unfortunate accident" and the missile was likely used by the Ukrainian air defence.

Rob Thummel, a portfolio manager at Tortoise Capital Advisors, said, "The macro is overtaking the micro in terms of crude," and he added that concerns about demand in China rebounding and how demand will withstand a potential recession are overwhelming supply fundamentals.

But it remains that the crude market globally is extremely tight, and Julian Lee, commodity analyst at Bloomberg, pointed out on Wednesday that anticipated output cuts from the Organization of the Petroleum Exporting Countries (OPEC) will ensure that stockpiles remain tight over the next few months.

Lee went on to note that demand forecasts from OPEC, the International Energy Agency, and the U.S. Energy Information Agency diverged considerably in 2022 and only briefly converge for the second quarter of 2023 "before diverging again for the second half of the year, this time with the EIA taking a more pessimistic view."

Lee stressed that regardless of the bearish prognostications stockpiles need to be rebuilt: "Commercial oil stockpiles in the OECD countries were sufficient to meet just 58 days worth of forward demand at the end of 3Q22; that's about four days less than the pre pandemic level of cover….emergency stockpiles controlled by governments were about six days lower using the same measure."

In related news on Wednesday, state-owned oil marketer SOMO told Reuters that Iraq plans to raise its production capacity to around 7 million barrels per day in 2027, although any increases will be in coordination with OPEC.