Crude Rises on Fleeting Circumstances as Citigroup Predicts Three Years of Oversupply

Tuesday August 27, 2019

The reaction on Tuesday to a much higher than expected draw in U.S. crude inventories was entirely expected: traders caused Brent to settle up 81 cents to $59.51 per barrel, while West Texas Intermediate ended $1.29 higher at $54.93 per barrel.

However, despite earlier signs that there may be an impending improvement in relations, the gains were said to have been capped by traders' worries about the trade war between the U.S. and China.

Plus, the cause for Tuesday's positive market performance is fleeting at best: the American Petroleum Institute showed U.S. crude inventories fell last week by 11.1 million barrels, compared with expectations for a 2 million barrel draw.

Tamas Varga, senior analyst at PVM Oil Associates, remarked, "A relative sense of calm has been restored, but it is simply impossible to know how long it will last; any market optimism will only prevail when the ink has dried on a new U.S.-China trade agreement."

Although he didn't mention China in his latest column, John Kemp, commodities analyst for Reuters, wrote on Tuesday that "There is plenty of scope for fund managers to add to long positions if fears about a global recession prove unfounded - or increase short positions if the economic outlook deteriorates.

"Net positions have changed relatively little since the middle of June, partly because senior staff are on holiday over the summer, and partly because of uncertainty about the macro outlook."

Kemp added, "Few changes are likely until the trajectory of the economy is clearer."

But the change in attitude may come about sooner than later due to shifting fundamentals: according to Edward Morse, global head of commodities research for Citigroup, new pipelines could help grow U.S. oil exports from the current 3 million barrels per day (bpd) by 1 million barrels more by year-end and another million barrels in 2021.

He said, "If the U.S. gets to 6 million bpd in three years, it will be hands-down the world benchmark," and he added that the extra oil "Is going to go everywhere: it goes to Asia, Europe, to India."

Morse went on to predict that "There's going to be an overabundance for the next two to three years: we see prices being challenged for the next two to three years, [and] we see Brent in the low $50s, and WTI in the high $40s, which is not an environment where there's going to be much as much reinvestment, as there is."