Crude Falls For 3rd Week, Citigroup Joins Those Seeing Higher Prices Ahead

Friday October 26, 2018

Crude made modest gains on Friday, but not enough to prevent a third straight week of losses for the U.S. benchmark, said to be driven by a slump in the stock markets and worries about trade wars negatively impacting demand in the near-term.

West Texas Intermediate ended Friday's session up 26 cents to $67.58 (a loss of 2.2 percent this week) while Brent climbed 72 cents to $77.61 per barrel, on course for an almost 3 percent weekly loss.

Jim Ritterbusch, president of Ritterbusch and Associates, said in a note that "The energy complex is maintaining a relatively strong correlation with daily swings in the U.S. stock market since the huge up and down equity fluctuations have become too large to ignore" - a reference to the fact that the S&P 500 and the Dow Jones Industrial Average erased their gains for the year.

The sell offs that have dominated the market of late seem to frustrate those who believe not enough attention is being paid to the prospective impact of the U.S. sanctions against Iran, which take effect early next month: Phil Flynn, senior market analyst at Price Futures Group Inc, said, “The high volatility in the stock market and fear selling in other markets is spilling over into the oil complex.”

He added, "The market has to wake up to the fact that Iranian sanctions are happening November 4: that's just a couple weeks away."

In a similar vein, Ed Morse, global head of commodities at Citi Research, told Bloomberg television that recent crude price increases were "the function of financial flows to the market: the managed money situation in the market went from one record level of a ratio of longs to shorts to another, went right through the old record of 10 to one longs versus shorts to 11, to 12, to 13 to 14; the price went up with it, and then for a number of reasons associated in part with the fundamentals not changing there was a sell off, and that sell off has continued.

"So we've actually seen two $10 swings that have nothing to do with market fundamentals [but] have a lot to do with financial flows, and had [traders] just waited a bit they probably would see that markets are going to get tighter by the end of the fourth quarter, prices will go up: it's a volatile world."

While Morse and Flynn's observations are hardly new, they detract from the possibility that traders have assessed the Iran situation and are tending to believe the voluminous assurance issued by Saudi Arabia, Russia, and other countries that shortfalls in Iranian exports can be compensated for; indeed, the Organization of the Petroleum Exporting Countries (OPEC) earlier this week sent signals that it may have to soon consider returning to output cutbacks in order to avoid what they think might be an oversupply in 2019.