What’s occurring with oil costs?

October began strong for the oil market, with WTI crude
prices rising 16% in the first week to $78, above the VWAP and
indicating an uptrend. Some feared prices could hit $100, raising worries about
inflation.

Several factors led to this change in sentiment after months
of decline. First, China
announced its largest stimulus package since 2020, which included a 50
basis point cut in the reserve requirement ratio.

The Politburo also emphasized the need for “necessary
budget expenditures” to achieve a 5% GDP growth target this year and
stabilize the property sector, boosting expectations for crude oil demand.

Second, geopolitical tensions have also played a role; on
October 1, Iran launched hundreds of ballistic missiles at Israel, with some
hitting their targets, escalating regional tensions further.

Although Israel is not an oil-producing country, and there
is no significant oil infrastructure near Gaza or southern Israel, Iran
remains a major player, with an estimated 4% of the world’s supply.

The concern was that if Israel attacked Iranian oil
infrastructure or if a major conflict broke out, Tehran could interfere with
the flow of oil through the Strait of Hormuz, triggering a rise in the
XAUUSD.

Some 20 million barrels of oil and oil products pass through
the strait, accounting for about 20% of the world’s oil trade. In addition,
about 20% of LNG trade also flows through the strait.

On a positive note, the latest US data has added some
optimism, showing that not only is the economy avoiding a recession, but the
labor market has also unexpectedly improved.

For instance, in September, the unemployment
rate fell to 4.1% from 4.2% in August, and non-farm employment growth was
+254,000, well above the +147,000 expected.

What went wrong?

First, although the PBOC announced stimulus measures,
markets fear they will not be enough without additional inflows of money to
boost consumer demand to the needed levels.

Some estimates suggest that around 27 trillion yuan will be
required, but China’s credit impulse hasn’t even hit 5 trillion. Without QE,
the country could be in a much stricter spot a year from now.

Now, it has been reported that Israel’s response will be
limited, suggesting that it will not target Iranian oil facilities. Sources
overheard a telephone conversation between Biden and Netanyahu confirming
this.

OPEC has cut its oil demand growth forecasts for the third
straight month due to falling demand in China. Now, demand is expected to grow
by 580,000 barrels per day (b/d), down from 650,000 b/d.

Next year’s global demand growth forecast is 1.64 million
b/d, down from 1.74 million b/d. So even if Europe and the U.S. do not suffer a
hard landing, the outlook remains bleak.