Crude Resumes Its Downward Trajectory on Fears of Oversupply

J.P. Morgan says prices will head lower through 2019. File Image / Pixabay

Having reached a summit of the roller coaster that is the crude trading market on Thursday, Friday saw the inevitable plunge in prices; and while Thursday's gains were based on hopes that the Organization of the Petroleum Exporting Countries (OPEC) might not increase production as previously thought, Fridays' losses were the result of traders shifting their concerns to what some analysts have been warning for months now: that rising crude supply is being accompanied by lower demand. 

Baker Hughes data showing that U.S. drillers added one oil rig in the week to June 8, bringing the total count to 862 (the highest level since March 2015), combined with reports that China's May crude oil imports eased away from a record high the previous month (from 9.6 million barrels per day to 9.2 million bpd), caused Brent to settle down 86 cents to $76.46 per barrel.

West Texas Intermediate's losses were less severe: the benchmark ended its session 21 cents lower at $65.74 per barrel.

The cause of Friday's losses is ironic considering so much focus has been paid over the past few weeks to the widespread argument that the crude market is tightening rapidly (due to dramatic declines in output from troubled major producers such as Venezuela), and to the point where even the mighty U.S. shale industry won't be able to meet demand.

Indeed, investment bank Jefferies reiterated that the market is tight and spare capacity could dwindle to 2 percent of demand in the second half of 2018, its lowest level since at least 1984 - but the warning went unnoticed, at least for the time being.

Meanwhile, Abhishek Deshpande, analyst for J.P. Morgan, delivered another blow to bullish sentiments by stating in a note on Friday that "While geopolitical tensions and lingering risks of large supply disruptions remain an upside risk throughout 2H18, we think that prices will be corrected downwards towards end of the year and remain capped in 2019."

Despite Deshpande adding that "There might be one last hurrah when it comes to prices, especially if OPEC were to announce a release of barrels which is less than what markets have priced in currently," the bank lowered its 2019 Brent forecast by $1, to $63 per barrel, and its outlook for WTI slightly to $58.25 per barrel.

J.P. Morgan also thinks supply-and-demand fundamentals are poised to weaken due partly to voluminous U.S. output, but it believes prices could still see a high side of $78.75 next year for Brent if OPEC and Russia extend their output limits into 2019 and geopolitical risks continue as expected.

Heading into next week, it's likely traders will continue to be influenced by what OPEC will or won't do at its Vienna meeting later this month; and on Friday Iran got a head start in spreading rumours with Hossein Kazempour Ardebili, that country's OPEC governor, stating that OPEC would not heed the appeal of the U.S. to Saudi Arabia to pump more oil in order to cover a drop in Iranian exports.

He said, "It's crazy and astonishing to see instruction coming from Washington to Saudi to act and replace a shortfall of Iran's export due to their Illegal sanction on Iran and Venezuela," and he added that "No one in OPEC will act against two of its founder members; the U.S. tried it last time against Iran, but oil prices got to $140 a barrel."

If the Vienna meeting is shaping up as the cause for further crude trading tumult, the tumult could be substantial: earlier this week, Commerzbank said the congregation "might be one of the worst OPEC meetings since 2011" since a portion of its membership seems prepared to argue against raising production and another portion will likely call for the opposite.