As talks with Iran stall, oil prices halt their swoon
Crude’s five-day losing streak finally comes to an end
Oil prices cruised back up Thursday after a stunning rally in China’s stock market and as weeks of negotiations between Iran and global powers failed to produce a nuclear pact ahead of a key deadline.
A deal could put Iranian crude into international markets that are already awash in oil.
The U-turn broke a fiveday losing streak in the oil market. Prices were weighed down for several days by signs that China’s economic engine may stall, requiring less fuel from overseas, and because Iranian negotiations in Vienna seemed on track for a deal earlier in the week. U.S. crude sank 13 percent from June 30 to Wednesday, the worst five-day streak of the year.
Despite Thursday’s gains, prices could still swoon under a global oil glut because, as recent government data show, U.S. production remains relatively high. And many U.S. producers were able to contract oil they would pump and sell in the future at $60 a barrel during May and June, when crude stabilized around that level.
That means they’ll have the financial means to drill and pump that oil in the next two or three months, adding to the supply glut, said Tariq Zahir, an oil analyst at Tyche Capital Advisors in New York.
“We firmly feel that prices will go lower,” Zahir said. “... The market broke off from that $60 range and now it’s off to the races. I think a lot of traders are just playing the market today.” He acknowledged that Iran is a “wild card,” but he was clear about one thing: “You just have too much oil out there.”
The U.S. crude benchmark rose $1.13 Thursday to $52.78 a barrel on the New York Mercantile Exchange. Brent, the international standard, rose $1.56 to $58.61 a barrel on the ICE
Futures Europe.
The local implications are clear: The energy-centric job market, along with the oil companies and their tool makers headquartered along Interstate 10, would get a boost if prices continue to rise.
Morgan Stanley analysts said they think oil prices will start to climb steadily as global demand solidifies and weakened production sends U.S. crude back up to $67 a barrel over the next 12 months. But, they noted, “the road ahead for oil prices will likely remain a bumpy one.”
Citigroup analyst Tim Evans said Thursday’s price climb suggests the oil market is buying into the idea that nothing has fundamentally changed globally and the factors driving the price down the past few days were temporary setbacks.
But he said several things have changed: the dollar is somewhat more expensive, meaning dollar-denominated oil is pricier for international buyers; Chinese stocks are still much lower than they were a month ago; Greece is still poised to default on its debt if it doesn’t reach an agreement this weekend with the European Union; U.S. crude stocks have unexpectedly swelled for two weeks in a row, snapping eight weeks of declines; and the 12-member Organization of the Petroleum Exporting Countries continued to bolster its crude production level last month.
“In our view, the crude oil market was overvalued relative to its ongoing physical surplus two weeks ago and it remains so today,” Evans said.
‘Real progress’
At a news conference in Vienna, U.S. Secretary of State John Kerry said Western powers have not yet reached an accord with Iran that would have limited its nuclear capabilities and most likely lift economic sanctions that have kept its oil out of international markets for three years.
Kerry said the Western negotiators are making “real progress toward a comprehensive deal,” but he warned the U.S. would not sit at the negotiating table indefinitely.
Friday deadline
Earlier this week, negotiators gave themselves a Friday deadline to reach a deal. If they miss it, Congress will have authority to take up to 60 days to review and approve the deal. Analysts say Congress might move to put more sanctions on Iran and cut oil exports to its few remaining legal buyers if the negotiators don’t reach a deal until August or September.
Analysts have disparate views on how quickly Iranian oil exports could reach international markets if economic sanctions were lifted as part of a nuclear pact. Some believe up to 700,000 barrels a day could be released in six months to a year; others say it will take up to two years.
Meanwhile, an index of Chinese stocks rose more than 5.8 percent in Shanghai, its biggest rise since 2009, alleviating oil traders’ worries that the Chinese government’s market intervention, which included halting trading for hundreds of firms, wouldn’t work and lead to more stagnation. China, the world’s second-biggest consumer of oil after the U.S., has seen its stock market lose more than 25 percent of its value in the past month.
Further stock market weakness in China could push oil prices down again, as could further signs this week that more oil could be brought into the oversupplied market, said Zahir, the oil analyst.
The International Energy Agency releases its monthly oil market report on Friday. Another market mover, Baker Hughes’ U.S. rig count, will also be issued Friday.