Crude Gains For the Week, But Analysts Send Conflicting Messages About Market Health

Friday July 12, 2019

As anticipated earlier this week, a tropical storm that forced oil producers in the Gulf of Mexico to reduce their output by more than half contributed to crude prices on Friday rising modestly, tempered by the prevalent specter of lower demand outlook.

Brent was up 37 cents, or 0.6 percent, to $66.89 per barrel, while West Texas Intermediate climbed 34 cents, or 0.6 percent, to $60.54 per barrel.

But although Friday's gains were unspectacular, they contributed to WTI rising nearly 5 percent for the week while Brent climbed over 4 percent.

However, contradictions remain rife in the crude analytical world and are causing deep uncertainty in the trading community.

For example, although U.S. crude inventories have decreased for four consecutive weeks, according to the Energy Information Administration (thus implying that demand is robust despite grim economic forecasts), the Organization of the Petroleum Exporting Countries (OPEC) this week blamed growing U.S. oil production for its forecast that world demand for crude will decline next year (thus implying a return of a surplus despite the cartel extending its output cuts to next year).

OPEC also said its oil output in June fell by 68,000 barrels per day (bpd) to 29.83 million bpd, above the 2020 demand forecast, suggesting that there will be a 2020 supply surplus of over 500,000 bpd if OPEC keeps pumping at June's rate.

The International Energy Agency is of similar mindset: it thinks surging U.S. oil output will outpace sluggish global demand and cause a large inventory build around the world in the next nine months.

Neil Atkinson, head of the oil industry and markets division at the IEA, said, "So, as far as the issue of re-balancing is concerned, as we say in the lead article in today's report, re-balancing is still some way off."

Unsurprisingly, this directly contradicts a statement made earlier this week by Gene McGillian, vice president of market research at Tradition Energy, who noted, "Tightened supplies have provided an undercurrent of support; the market is showing signs of stabilizing."

Of course, also causing trading trepidation are the growing tensions between Iran and the West: Tehran on Friday said Britain was playing a "dangerous game" after last week's seizure of an Iranian tanker on suspicion it was breaking European sanctions.

Stephen Brennock, analyst at PVM Oil Associates, remarked, "Only time will tell whether this turns out to be a case of wishful thinking but one thing is clear: geopolitical risks are here to stay."