The price action across the oil market remains jittery. The two leading crude benchmarks traded in a range of almost $4/bbl on Tuesday as tensions built ahead of this week’s main risk event. Brent and WTI initially traded around $1/bbl lower before resuming their climb to settle roughly 50 cts/bbl higher on the day. Buying pressures were spurred on by a Reuters poll pointing to a decline in US crude and gasoline stocks. Also giving oil prices a lift was OPEC’s technical committee reducing its outlook for a market surplus for this year. The OPEC JTC forecast that this year’s global oil market surplus would be 800,000 bpd—a downward revision of 200,000 bpd from last month’s estimate.

Overnight, the mood soured after the API reported that US crude stocks rose by 2.2 million bbls last week. On a more supportive note, it also showed a modest drop in oil product inventories. Gasoline and distillate fuel stockpiles fell by 200,000 bbls and 350,000 bbls, respectively. Oil prices are treading water at the time of writing ahead of the double-whammy of OPEC’s meeting and the latest EIA inventory report. That being said, the ingredients are there today for some price fireworks.

Changing winds?

A new chapter is about to be written in the OPEC story. OPEC and its allies have officially rolled back the full volume of cuts as of August and must now decide its next step in the post-pandemic era. Today’s OPEC+ meeting on supply adjustments for September and beyond takes on a new imperative. Yet such a noteworthy occasion is unlikely to deliver any major surprises. Expectations are that the producer alliance will not announce a new production hike. Even if the OPEC+ group did declare a small increase, the gesture would be largely symbolic given that very few members have the capacity to materially increase production.

Either way, OPEC will be wary of rocking the boat given the current volatile and turbulent state of the oil market. Brent kicked off August with a 4% drop and in doing so joined the US crude benchmark below $100/bbl. It then staged a partial recovery yesterday. Such volatility should not come as a surprise. After all, August is a holiday month, and the usual liquidity draught makes the market prone to exaggerated movements in either direction. And the prevailing direction is down.

The reason for this negative bias is the deteriorating crude demand picture on the back of disappointing economic data. Figures released last week showed the US economy suffered two consecutive quarters of negative growth. Concerns about the global economic outlook were further stoked this week by weak manufacturing data for July out of the world’s biggest economies. Meanwhile, China’s adherence to its “Zero-Covid” policy will likely continue weighing on the country’s economy and hence fuel demand. And to make matters worse the world’s major central banks are hiking rates into shrinking economies. Simply put, the global economy is teetering on a recession.

This economic malaise is reflected in the latest batch of price forecasts. The EIA now sees Brent this year averaging $104/bbl, down more than $3/bbl from a previous estimate. Moreover, analysts in the latest Reuters poll reduced for the first time since April their forecast for 2022 average Brent prices to $105.75/bbl.

However, the path for further downside remains clouded amid a tightly supplied global market. Inventories remain below the five-year average despite builds in global oil stocks seen for the first time in two years. Echoing this bullish backdrop is the strong backwardation in physical and paper markets. All the while, OPEC production constraints look to keep crude supplies tight. A Reuters survey on Monday showed the 10 OPEC members again pumped far less than called for last month. Output undershot the July target by 1.3 mbpd, and compliance with the remaining pledged cuts was 418%, up from 253% in June. Dwindling OPEC spare capacity together with low oil inventories should put a floor under oil prices.

And there may even be a year-end spike in oil prices. Russian oil exports remain stable but will likely take a sizeable dip once Western sanctions take full effect in the final quarter of 2022. What’s more, in October the global oil market will lose 1 mbpd in supply from the US SPR. Neither of these bullish catalysts is currently priced into the market. Accordingly, a revisit to this year’s peaks cannot be discounted. In the meantime, oil prices are unlikely to slip below $90/bbl with Brent stabilising in the low $100s for the foreseeable future.