Crude price nears red zone, may hit demand if it tops $85-90 level
continued to rally for yet another week, as traders stayed focussed on potential disruptions to global crude supplies in the upcoming week, as looming US sanctions on Iran are widely expected to lead to a tighter market.
The oil mart has been caught between a tales of two markets. The first is US sanctions against Iran’s oil exports come into effect in November which is bullish for prices. The other is the on-going trade dispute between the US and China could escalate and drag down the global economy and bearish for crude. Still the market seemed to give more importance to the bullish news.
The catalyst for crude prices for getting tighten was the worries about tighter supply conditions once Washington’s sanctions against Iran’s crude oil exports kick in beginning in November.
Investors are still not sure about how much oil will be removed from the market once sanctions start. But, we have already seen that India, Japan and South Korea are already scaling back on purchases of Iran crude oil, which suggests that the number will be bigger than previously thought.
The EIA reported crude supplies rose by 8 million barrels for the week ended September 28 — the largest weekly climb year to date. Gasoline stockpiles fell by 500,000 barrels last week, while distillate stockpiles declined by 1.8 million barrels.
reported a dip of two in the oil and gas rig count in the US this week, bringing the number of active oil rigs decreasing by two to reach 861 and the number of gas rigs holding steady at 189.
The larger effect on oil market would come from negative impact on the global economy.
However, more the tariffs continue to spiral, more likely it is that there will be a negative impact on the economy and oil demand of the world’s two largest oil consumers.
The trade war could hit the oil and gas markets in several ways. First, the back-and-forth escalation of tariffs could drag down economic growth.
The first round of tariffs, which hit $50 billion in Chinese goods, targeted a relatively narrow set of products. But the latest $200 billion in tariffs will raise the cost for a wide array of consumer goods in the US, which could slow the economy.
Second, oil and gas are likely to be specifically affected by the trade war, which wasn’t the case in the previous rounds of tariffs.
The supply picture right now is currently looking worrisome, with Venezuela and Iran supporting to drive prices higher. US shale can partially make up difference, but the explosive growth from shale drillers is starting to slow down, in part because of pipeline bottlenecks.
This means that there isn’t the same upward pressure on WTI as there is on Brent, largely because infrastructure bottlenecks in the shale patch keep supplies somewhat stuck within the US.
The six-month Brent calendar spreads are trading in a backwardation of around $2 per barrel, which is comparable to the corresponding point in September 2007. But hedge funds have amassed a large bullish position in
, amounting to almost 470 million barrels, betting prices will head even higher.
Largely, it appears that bearish sentiment from within the oil and gas industry has evaporated. The escalating US-China trade war, and weakening currencies in major Asian oil importers such as India are all expected to cap rising oil prices as global economic and oil demand growth could suffer if Brent crude breaks above the $85-$90 band.
The oil market has been paying more attention to tightening supply than concerns about demand.
(The writer is AVP commodity research at Motilal Oswal Financial Services Ltd)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of