Oil rally faces tidal wave of sup­ply

Tehran Times - - ENERGY -

The oil mar­ket’s two-year bull run is run­ning into one of its big­gest tests in months, fac­ing a tidal wave of sup­ply and grow­ing wor­ries about eco­nomic weak­ness sap­ping de­mand world­wide.

Af­ter top­ping out at more than $75 and $85 a bar­rel just a month ago, both U.S. crude and Brent bench­mark fu­tures have grap­pled with near-re­lent­less sell­ing. For a time, prices had some sup­port on hopes that re­newed U.S. sanc­tions on Iran would force bar­rels off the mar­ket.

That changed in the last week. The world’s three largest pro­duc­ers - Rus­sia, Saudi Ara­bia and the United States - all in­di­cated they were pump­ing at record or near-record lev­els, while the United States said it would al­low waivers that could al­low buy­ers to keep im­port­ing Ira­nian oil, less­en­ing the threat of a sup­ply crunch.

Those fac­tors, along with a spate of re­cent weak eco­nomic re­ports out of China and other emerg­ing mar­kets, have shifted the con­ver­sa­tion back to­ward wor­ries about over­sup­ply, and pushed U.S. fu­tures to lows not seen since April, in­ter­rupt­ing an up­ward move that had con­sis­tently found sup­port dur­ing the rally’s mod­est pull­backs.

The struc­ture of the U.S. crude fu­tures curve had for sev­eral months in­di­cated ex­pec­ta­tions for tighter sup­ply, but fu­ture­dated con­tracts now sug­gest in­vestors think mar­kets could be awash in oil over the com­ing months.

“The mag­ni­tude of re­cent sell­ing is strongly sug­gest­ing that global oil de­mand is weaker than ex­pected as a re­sult of tar­iff is­sues, es­pe­cially be­tween the U.S. and China,” said Jim Rit­ter­busch, pres­i­dent of Rit­ter­busch & As­so­ci­ates.

There has been an ex­o­dus among spec­u­la­tors as well. In the last two weeks, net bullish bets on oil have de­clined to the low­est level in over a year. Sell­ing no­tably ac­cel­er­ated on Thurs­day af­ter U.S. West Texas In­ter­me­di­ate (WTI) crude fu­tures fell be­low $65 a bar­rel, a level that had stood firm in pre­vi­ous sell­offs dur­ing the sum­mer and fall.

The oil mar­ket ran higher in an­tic­i­pa­tion of this week’s for­mal re-im­po­si­tion of sanc­tions against Iran by the United States, and on con­cerns that sup­ply from pro­duc­ers like Saudi Ara­bia would not be able to make up the dif­fer­ence.

How­ever, the U.S. gov­ern­ment said on Fri­day it will tem­po­rar­ily al­low sev­eral coun­tries in­clud­ing South Korea and Turkey to keep im­port­ing Ira­nian oil when U.S. sanc­tions come back into force on Mon­day, spar­ing them for now from the threat of U.S. eco­nomic penal­ties.

Still, some an­a­lysts be­lieve the cur­rent sell­off has come too far, too quickly. Ma­jor OPEC pro­duc­ers won’t be able to add more sup­ply should it be­come nec­es­sary, par­tic­u­larly with pro­duc­tion in Iran, Venezuela and Libya still at risk.

“A loss of 1 mil­lion bpd from Iran, fur­ther de­clines in Venezuela, cou­pled to­gether with geopo­lit­i­cal dis­rup­tion in Libya and Nige­ria could eas­ily wipe out what lit­tle spare ca­pac­ity we have left,” Bern­stein an­a­lysts said this week.

Out­put from the Or­ga­ni­za­tion of the Pe­tro­leum Ex­port­ing Coun­tries, led by Saudi Ara­bia, rose to lev­els not seen in two years. U.S. pro­duc­tion hit a record 11.3 mil­lion bar­rels a day in Au­gust, and Rus­sia’s out­put rose to 11.4 mil­lion bpd, a post-Soviet era peak.

For U.S. crude, the key area to watch is be­tween $64.45 and $64.80, where prices had found sup­port in the past, said Fawad Raza­qzada, an­a­lyst at fu­tures bro­ker­age Forex.com. If oil dips be­low this point, “the path of least re­sis­tance would be to the down­side,” he said.

For Brent, Raza­qzada is watch­ing the range be­tween $69.50 and $69.60 a bar­rel, and if it were to slip be­low that, we could see a much larger cor­rec­tion, he said.

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