Oil Nosedives As JP Morgan Warns That "Demand Destruction Has Begun"

Meanwhile, OPEC decides to maintain its extended output cutbacks:File Image/Pixabay.

After clawing back earlier losses on Tuesday, oil traders on Wednesday panicked over news that demand destruction for the commodity has begun – and caused crude to plummet by a massive 5.6 percent, the most in 2023.

Brent settled down $5.11, or 5.6 percent, to $85.81 per barrel, while West Texas Intermediate settled down $5.01, also 5.6 percent, to $84.22; both Brent and WTI have now dropped below their 50-day moving averages, a bearish technical signal.

The U.S. Energy Information Administration as well as JP Morgan delivered the bad news on demand, the former disclosing that finished motor gasoline supplied (a proxy for demand), fell last week to about 8 million barrels per day (bpd), its lowest since the start of 2023.

While U.S. crude stocks fell by 2.2 million barrels to 414.1 million barrels in the week to Sept. 29, gasoline stocks rose by 6.5 million barrels compared to expectations of a mere 200,000-barrel rise.

JP Morgan analysts stated in a note that a 30 percent spike in fuel prices in the third quarter of this year depressed demand, resulting in a counter seasonal plunge of 223,000 bpd; the note was titled 'Demand destruction has begun (again)' and also included the statement that "demand restraint from rising oil prices is once again becoming visible in the US, Europe, and some EM countries."

The analysts added, "China and India drove global oil demand growth this year, but China opted to draw on domestic crude inventories in August and September after oil prices surged."

Jim Ritterbusch, president of Ritterbusch and Associates, pointed out that crack spreads, a proxy for refining margins, fell below $20 per barrel on Wednesday to the lowest level in about 1.5 years, an indication that high prices and interest rates are curtailing crude inventory purchases and increasing odds of a recession: "This could force further demand weakness that the Saudis and Russia may be unable to counter via additional production cuts."

Wednesday's calamitous trading activity was capped by the online meeting of the Organization of the Petroleum Exporting Countries' Joint Ministerial Monitoring Committee, which decided to maintain its extended production cutbacks rather than lift them; this was followed by Saad Al Barrak, oil minister for Kuwait, claiming that oil markets are heading "in the right direction."