Syed Rashid Husain
While the world awaited the outcome of the deliberations in Vienna on Iranian nuclear program, uncertainty ruled the crude markets making it swing – in patches.
As the ongoing nuclear talks between Iran and six world powers appeared dragging beyond the Thursday’s midnight deadline giving the US Congress an extra month to review the deal, oil markets recovered on Thursday from the lows it experienced earlier in the week.
In the meantime, the panic selling of equities on the Chinese stock markets earlier in the week generated concerns about the state of the economy of the world’s largest crude importer.
These included trading suspensions and cheap financing, resulting in a rebound, impacting the crude market sentiments too – rather positively – after the bloodbath witnessed at the beginning of the week.
The picture at the beginning of the week was even grimmer. Oil prices were falling amid concerns about Greece, the upheaval in the Chinese markets and the continued oversupply of crude oil.
Chinese stocks took a plunge after the country’s securities regulator warned. Investors were in the grip of “panic sentiment” and the market showed signs of freezing up as firms had their shares suspended.
Crude markets took the hit. “Investors have justifiable concerns about the outlook for both supply and demand going forward given current events,” Reuters reported. “Turmoil in China and Greece may put recent robust demand growth at risk,” Morgan Stanley analysts said in a report.
Resilience of the US shale output was also seen impacting the crude dynamics. Despite the clamor by some that low oil prices would impact the US shale output considerably, it has proved to be more immune to lower oil prices than many had anticipated.
US inventory data showed an unexpected increase in US domestic crude supplies, sinking the US benchmark price of oil to a three-month low. US shale gas production in conjunction with oil coming from traditional sources contributing to a global glut were pushing the energy prices down.
However, the outlook began to change by Thursday, as some stability seemed returning to Chinese markets and the deal with Iran too appeared delayed.
Yet the medium to long term crude view continues to be hazy – at best. Markets are nervous. Since hitting the year-high of $69.63 barrels in May this year, oil markets have fallen significantly.
Oil prices are “massively oversupplied,” and may fall further, the Paris-based International Energy Agency said in its Monthly Oil Report, emphasizing the market was unable to absorb the huge volumes of oil now being produced. “The bottom of the market may still be ahead,” it said in rather bold letters.
Adding to the gloom was its forecast that the global oil demand growth was to slow down to 1.2 million bpd in 2016 from an average 1.4 million bpd this year.
Others too are betting on an oversupply scenario. “We do think there’s risk of oversupply for a long time,” Bart Melek, head of commodities strategy at TD Securities was quoted as saying.
“Technically on WTI, we’ve fallen through some technical support levels and, depending on what happens, we could test the low.”
Looking at the long-term chart of US oil production going all the way back to the 1920s, Carley Garner, the co-founder of DeCarley Trading, pointed out that the US has doubled its monthly oil output since the lows of 2008 and is nearly back to its peak levels set back in the 1970s.
Thus, unless some sort of unforeseen powerful even occurs, she believes that the oil market will be oversupplied for a long time.
Crude markets have been struggling this year with the ramped-up production from OPEC members as they pledged not to back off on their 30 million barrels-per-day production target. Yet OPEC was producing even beyond this.
In June, the OPEC output touched 31.3 million barrels a day, Platts reported. The US, meanwhile, has also been producing at about 9.6 million barrels a day, and the Energy Information Administration now projects US average output this year to be 9.47 million barrels a day. Consequently the markets are oversupplied by 1.5 to 2 million barrels a day.
The strengthening dollar is also adding to the woes of the crude markets. Generally speaking, the US dollar and oil prices tend to move in opposite directions. As the US dollar appreciates, oil prices tend to decline and vice versa.
With the prospects of the US dollar gaining in value, for the US Federal Reserve is expected to raise interest rates later this year and the crisis in Europe could compel investors to seek safer currencies – meaning greenback – oil prices are projected to recede even further.
Goldman Sachs analyst thus believe the price of US crude will sink to $45 a barrel by October. “Oil rebalancing remains in its early stages with the current cash flow and funding mix stalling it,” Goldman analysts wrote, referring to the global oil glut that has surpassed worldwide demand for oil.
“We believe that as fundamentals reassert themselves and we move past the seasonal peak in demand, oil prices will continue to sequentially decline.”
Goldman thus underlined, big buyers of crude around the world are probably done snapping up oil simply because it’s cheaper, and that combined with higher oil production out of the Organization of Petroleum Exporting Countries will weigh down prices.
Continued growth in global petroleum and other liquids inventories are also holding the crude markets from rising. Oil inventories remain near the highest levels for this time of year in about 80 years, even though they had recently declined for eight straight weeks, a streak that was only broken end June.
In a June note, Morgan Stanley’s Adam Longson noted that even with peak summer demand, there weren’t enough buyers for all the crude oil out there. Oil tankers were reported to be sitting on the Atlantic, waiting to be bought.
When seasonal, summer demand dies down, it would be even harder to get rid of all the stockpiles that should have been sold, Longson underlined.
The cost of oil tankers is on rise, too, adding to the hint of approaching glut. Oil tankers have become expensive — a sign drillers are flooding the market once more.
Bloomberg report in May that the daily rate of oil supertankers surged to the highest level in seven years on a sudden rise in demand from producers.
‘The daily rate for oil supertankers is at its highest level for this time of year since 2008,’ the reported emphasized.
Despite some strengthening early last week, gloom seems back in control!