Market Minute: Oil Prices Higher is Supply Side Driven

WTI Crude rose over 2% to start the week to over $71 per barrel as OPEC+ reversed its earlier decision to increase production by 180,000 barrels per day (bpd) by December. This decision reflects OPEC+’s acknowledgment that demand for petroleum products remains weak across member nations. Recently, global supply has exceeded demand, with China’s lukewarm "reopening" narrative further dampening energy markets. Chinese refining output is expected to decline in the fourth quarter due to sluggish domestic demand, affirming views that current stimulus measures have done little to drive robust growth in China’s industrial and consumer sectors. 

OPEC+ is also closely monitoring the upcoming U.S. elections, as shifts in energy policy could occur swiftly depending on the election outcome. Under the previous Trump administration, a greater emphasis was placed on Middle Eastern production, particularly from Saudi Arabia, to increase market supply and apply economic pressure on Iran. If similar policies are reintroduced should Donald Trump win the presidency, we may see downward pressure on oil prices, potentially impacting profit margins for domestic shale producers. 

OPEC+’s decision isn’t the only factor providing a potential bullish outlook for oil this week. A Federal Reserve interest rate decision on Thursday may also play a role. Given generally strong economic indicators, aside from Friday’s weak jobs report, a rate cut could fuel consumption growth, helping to relieve the supply side and improve profit margins. 

Finally, short positions in the weekly Commitment of Traders report published by the CFTC suggest a potential short-covering rally if demand fundamentals strengthen. Heating oil, in particular, is close to one of its largest net-short positions since it began trading on the NYMEX. With seasonal demand factors at play, heating oil may serve as an early indicator for a sustained rally in the energy sector if demand conditions improve and confidence among energy bulls strengthens.