Oil Markets Outperform Equities Across August

Enthusiasm across markets was visibly subdued throughout August, compared to the previous month. Oil prices managed to eke out slight gains on the month, but equities suffered a setback, and this discrepancy sums up the state of the global economy.

West Texas Intermediate (WTI) settled 2.2% higher with Brent registering a monthly return of 1.5%. Heating Oil and Gasoil were the bellwethers of the protracted strength, despite the month end underperformance as they rallied 5.1% and 3.6% respectively but Reformulated Gasoline Blendstock for Oxygenate Blending (RBOB) settled 5.5% in the red. The Morgan Stanley Capital International (MSCI) All-country Index shed 3% of its value in August, the Shanghai Composite Index lost 5.2% and the Nasdaq Composite index declined 2.2%.

The monthly performances of different asset classes neatly demonstrate that oil market support possibly came from the supply side. Confirming it, the Russian deputy prime minister implied that an agreement within the OPEC+ coalition to further reduce oil supply has been reached with details published next week. Not only did outright prices prove solid in the oil complex last month but the backwardated curves on the crude oil contracts also remained resilient. An additional sign of genuine physical tightness is observed in the Brent CFD market where Dated Brent, which was assessed 35 cents/bbl over its forward peer at the end of July for the nearest week, extended its premium to over $1/bbl by the end of last month.

The voluntary output reduction from Saudi Arabia and the export cut from Russia is being felt. Global and OECD inventories are widely anticipated to plunge in the coming month, a proof of which is found in US commercial stockpiles. They declined more than 19 million barrels this month with crude oil leading the charge. Additional support is anticipated from the tightness in the global distillate market and the unpredictable LNG segment could add another bullish layer to the energy complex.

Anxiety about brighter economic prospects, on the other hand, has grown considerably. The signs are distinctively more ominous on the economic front. The manufacturing sector clearly struggles in the developed part of the world; it contracted in the US, the eurozone and the UK. Whilst this, together with mitigated inflationary pressure, could be taken as a sign of effective central bank policies over the last year or so, monetary potentates have warned against complacency at their annual meeting at Jackson Hole at the end of last month. The three-day symposium was dominated by the higher-for-longer debate.

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