Oil Price Lost Gains Since Start of Geopolitical Conflict, Here Are the Key Factors.

Crude oil futures have lost almost all their gains since the start of the Israeli-Palestinian conflict, and a picture of unstable oil demand has emerged, especially in Europe and OECD Asia, which has weakened the bullish sentiment in the crude market.

Weak economic growth is putting pressure on manufacturing, reducing demand for diesel and naphtha, according to Wood Mackenzie Ltd.

Previously, the oil market was supported by production cuts by OPEC+ leaders Saudi Arabia and Russia. Over the weekend, both countries said they would keep restrictions in place until the end of the year. But neither these measures nor the Palestinian-Israeli conflict can prevent the decline in oil prices.

In the options market, calls on crude oil are no longer more expensive than puts, another sign that conflict risk premiums are fading.

Options have taken on a rare bullish skew soon after the war broke out, with traders paying a premium for contracts to hedge against a spike in oil prices. The oil market has been watching for an escalation of tensions. But now, with the conflict yet to spill over into a broader regional confrontation, options against lower crude prices have become more expensive. Traders now believe there is little imminent danger of the conflict escalating and drawing in countries such as Iran.

Hedge funds are also exiting long positions taken up following the outbreak of the war. In the week to October 31, they sold off the equivalent of more than 70mn barrels of crude oil across Brent and WTI, the two market benchmarks, according to data from the US Commodity Futures Trading Commission.

Crude oil inventories in the United States rose by a staggering 11.9 million barrels for the week ending November 3, according to The American Petroleum Institute (API), after a 1.347-million-barrel rise in crude inventories in the week prior. Total US oil production recently hit an all-time high of 13.2 million barrels per day.

Bloomberg reported shale industry legend Harold Hamm is looking to pull crude from "Generation 3" rock. This is a tougher form of rock that was largely neglected earlier in the shale revolution. The turn toward new practices would come as site depletion becomes a growing worry for the sector, while rising costs mean drillers need higher crude prices to profit.

Efforts to extract crude from Gen 3 rock would open up sites that have been largely passed over. Already, Hamm noted that work with Gen 3 material was ongoing in Oklahoma, a source of optimism for the Continental Resources chairman.

Besides major oil suppliers, Venezuela's oil industry seeks revival too. Venezuela's state-run oil company, PDVSA, is maneuvering to enhance its oil output following the temporary relaxation of US sanctions. The Treasury Department's Office of Foreign Asset Controls (OFAC) granted a six-month reprieve from most sanctions on Venezuela's oil sector, green-lighting the country to freely produce, export, and sell its oil, gas, and fuel supplies.

According to Bloomberg, Gunvor Group Ltd. offered a supertanker of Venezuelan oil to US refiners in the first such post-sanctions foray by a major commodity- trading house.

The company is the first major trading house to market Venezuelan crude since US President Joe Biden's administration relaxed long-standing sanctions aimed at isolating the Latin American nation.