Sixth Straight Weekly Loss for Crude, But IEA Predicts "Very Challenging" Times Ahead

Friday August 10, 2018

A 1 percent increase in crude prices on Friday due to familiar worries that the U.S. sanctions against Iran would tighten global supplies was hardly enough to prevent West Texas Intermediate from posting its sixth straight weekly loss, the worst losing streak in three years.

WTI settled up 82 cents at $67.63 per barrel, contributing to a weekly drop of over 1 percent; Brent rose 72 cents to $72.79 per barrel, but it too was down this week, by roughly half a percent.

Tariq Zahir, managing member of Tyche Capital Advisors, said he was not surprised by Friday's modest bounce back but that prices would likely continue to fall as U.S. gasoline demand slows and refiners close for annual maintenance.

Plus, as noted by Reuters, trade disputes between the U.S, China, and other countries have caused economists to predict lower global economic growth and boosted the U.S. dollar, making oil more expensive for consumers using other currencies.

Add to this yet more news on Friday of production capability - this time in the form of U.S. drillers adding 10 oil rigs in the week to August 10, bringing the total to 869, the most since March 2015 - and it would seem that if nothing else, the market can stop worrying about supply shortages, regardless of what geopolitical strife erupts in the foreseeable future.

But the International Energy Agency on Friday warned that price turbulence lies ahead.

In its latest monthly report, it stated, "The recent cooling down of the market, with short-term supply tensions easing, currently lower prices, and lower demand growth might not last.

"As oil sanctions against Iran take effect, perhaps in combination with production problems elsewhere, maintaining global supply might be very challenging and would come at the expense of maintaining an adequate spare capacity cushion; thus, the market outlook could be far less calm at that point than it is today."

Neil Atkinson, head of the oil industry and markets division at the IEA, conceded that "Certainly in the short term, there are no serious issues about supply because we have seen oil production in Saudi Arabia increase, in Russia increase, and in one or two other Gulf countries.

"But as we say in the report, although things may be cooling down a little bit right now, we cannot get away from the fact that later in the year....we could be in a different situation where supply may be more constrained and there would then perhaps be a risk of the oil price increasing,"

Interestingly, the IEA seemed to be a lot less pessimistic about the U.S. trade war with China, noting that "The threat of trade disruption could recede as fast as they are mounting.....and it is difficult at this stage to make adjustments to our base case assumptions for the economy and oil demand."

The analytical community appears to be divided with regards to how the market will perform this year and beyond, with one camp including PVM Oil Associates favouring the notion that global supply will tighten, and individuals such as John Kilduff, founding partner at Again Capital, recently noting that traders' geopolitical concerns have for the main receded and "supply is seen as sufficient to meet the pretty robust demand picture."