WTI supply risks in focus ahead of US CPI

West Texas Intermediate (WTI) has been on the back foot on Wednesday, losing over 1.8% on the day into the close on Wall Street. OPEC lowered its demand expectations for this year and next following the cut to production targets made last week by two-million barrels per day. At the time of writing, WTI is trading at 87.03 having travelled between a low of $86.30 and a high of $90.05. 

Oil prices are a key theme this week with regard to Thursday's release of the US Consumer Price Index where core prices have likely stayed strong in September, with the series registering another large 0.5% MoM gain. ''Shelter inflation likely remained strong, though we look for used vehicle prices to retreat sharply. Importantly, gas prices likely brought additional relief for the headline series again, declining by about 5% MoM. Our MoM forecasts imply 8.2%/6.6% YoY for total/core prices,'' analysts at TD Securities explained. The data will likely be firming the Federal Reserve's determination to slow the economy through higher interest rates and heightening the recession fears that have been a bearish factor for oil.

Meanwhile, energy supply risks are rising at a fast clip and in its influential Monthly Oil Market Report, OPEC cut its 2022 demand forecast by 0.5-million barrels per day due to "the extension of China's zero-COVID-19 restrictions in some regions, economic challenges in OECD Europe. OPEC+'s cut to production targets last week comes despite opposition from the Biden Administration as the group looks to bolster high prices for oil

''The OPEC+ group's effective 1.1m bpd cut will tighten physical balances, providing a positive catalyst for both spot prices and timespreads and thereby incentivizing additional participation,'' analysts at TD Securities argued. ''This is creating a set-up for a substantial rise in prices as the US SPR releases grind to a halt, while Russian production starts to be eroded at a faster clip. While the resumption in flows from Kazakhstan provides a partial offset, oil industry strikes in Iran have reportedly spread to a major crude refinery in the southwest, further adding to supply risks. The right tail in oil prices is still fat.''

''Meanwhile, a pipeline leak is halting an estimated 200k bpd of flow from the Northern Druzhba pipeline, exacerbating the near-term tightening in balances. This leaves traders' attention placed on the demand side of the equation — a very-hard landing could still derail the recovery in energy prices, but the garden-variety recession that most economists expect is likely to see oil demand growth slow, but not decline. This could exacerbate the tightening in energy markets at a time when Chinese mobility continues to firm, as highlighted by our tracking of road traffic conditions for the top 15 cities by vehicle registrations.''