Stockpile Build Offsets Gaza Concerns, Oil Prices Rudderless

Mixed signals continue to keep oil prices rangebound: File Image/Pixabay

Reported escalating tensions between Israel and Hezbollah in Lebanon were enough to detract crude traders on Wednesday from focusing on a surprise build in gasoline inventories, and this resulted in a session of minuscule gains for the commodity.

Brent settled up 24 cents at $85.25 per barrel and West Texas Intermediate settled up 7 cents higher at $80.90 per barrel.

Andrew Lipow, president at Lipow Oil Associates, said, "The geopolitical risk premium has been coming back to the market as a war between Israel and Lebanon is likely to see direct involvement of Iran, that would be a concern."

Potential expansion of the Gaza war, which has been the topic of analytical debate for months now, eclipsed news from the U.S. Energy Information Administration of a 3.6 million barrel jump in the country's crude oil stocks last week; analysts had anticipated a drawdown.

Rob Thummel, a portfolio manager at Tortoise Capital Advisors, remarked, "The mixed signals the oil market is sending has made it difficult to break oil out of that trading range; we'll find out in the coming months where oil is going as we see how summer demand is doing."

Meanwhile, Bloomberg observed that "Both futures and physical markets are also signalling some overhang in supplies: the prompt spread for WTI has weakened to about 72 cents in backwardation, down from as high as $1.15 last week.

"At the same time, physical prices of WTI Midland at the main hub of Houston slid to the lowest since October amid poor overseas demand."

What remained unchanged on Wednesday was the loose concession among experts that the oil market was still headed towards good fortune.

Standard Chartered told investors in a note on Wednesday that with regard to Brent having rallied by over $9 per barrel this year, the rally has "significantly further to run" and it now believes that "with the Q3 supply deficit only partially mitigated by the start of OPEC+ production increases in Q4, we could be looking at a supply deficit beginning in August." 

In an investor report, Standard Chartered added that "The increase in demand towards its seasonal peak is the key driver of supply deficits of over 2 million barrels per day in both August and September…..we do not expect the market to swing back into surplus in Q4 despite the seasonal fall in demand and increases in OPEC+ output."

For his part, Ole Hansen, head of commodity strategy for Saxo, said members of the Organization of the Petroleum Exporting Countries need Brent to trade closer to $90 to balance their budgets and noted that "From an investor perspective, the crude oil market continues to yield a better return than what the change in the spot price is indicating."