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Demand Destruction Concerns


Crude oil has started the week with move to a new 1 1/2 week low. There are reports that the OPEC Plus nations missed their August production target by more than 3.5 million barrels per day, but that has provided little support this morning. We see the near-term bias pointing down, with the macro condition keeping demand fears front and center. While the actual daily world oil supply balance is nearly impossible to estimate (due to the typical delay in measuring global demand), a report last week predicting a 1.8 million barrel per day surplus should keep the bull camp on the back foot to start the week. There are signs of more consistent flow from Libya, and it is possibly that China has achieved an acceptable strategic supply level. Predictions China will see its 2022 energy demand fall below 2021 gives the bear camp significant confidence.

oil field sunset


With a very damaging downside failure at the end of last week, a bearish track in the latest hurricane threat, and periodic evidence of building European strategic supply, the bull camp will need additional supply threats from Putin to avoid further declines. There is another tropical depression attempting to organize off the African coast, but without a “pop-up storm” the bear camp should remain confident. The most likely bullish fundamental trigger is the potential for Russia to cut off other supply flows to discourage implementing a price cap.  A temporary pause in hurricane fears, significant chart damage last Friday, and generally bearish economic sentiment set a near term downside target in October gas at $7.490. However, the Russian situation remains highly volatile, and moderate declines in prices should bring out aggressive bargain-hunting, especially from those building winter reserves!

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