Crude Prices Soft as Uncertainty Rules: Analysts See $50/bbl Just as Likely as $100/bll

by Ship & Bunker News Team
Monday August 13, 2018

Crude prices continued their downward trajectory on Monday due to concern over mounting stockpiles and waning demand - but at least one respected oil investor pointed out the market is so volatile that a surge above $100 in the near future could come just as quickly as prices of $50 per barrel.

West Texas Intermediate ended Monday's session down 43 cents to $67.20 per barrel, while Brent declined 20 cents to $72.61 per barrel after briefly dropping to a nearly four-month low of $71.04.

The causes for Monday's performance were Genscape reporting that inventories at the Cushing, Oklahoma, delivery hub for WTI rose by about 1.7 million barrels in the week through August 10 (possibly due to the Canadian Syncrude processing facility ramping up light oil production in anticipation of a return to full production next month); and further signs of a slowing global economy.

Specifically, CNBC noted that Turkey's financial crisis has raised the risk of contagion throughout emerging economies, dragging down South Africa's rand, Argentina and Mexico's pesos, and the Russian rouble: "It has also dented emerging market stocks while curbing growth and the outlook for oil demand."

Jim Ritterbusch, president of Ritterbusch and Associates, said in a note that even though Turkey is a relatively small oil consumer, "The energy complex is being increasingly jostled by fresh daily headlines that don't necessarily have much effect on current supply or demand on a short term basis but could dramatically affect oil balances when looking down the road just a few months."

News of Turkey's woes comes on the heels of the Organization of the Petroleum Exporting Countries (OPEC) in its latest monthly report stating that the world will need 32.05 million barrels per day (bpd) of crude from the cartel in 2019, down 130,000 bpd from last month's forecast.

All of this inspired Tom Kloza, co-founder of the Oil Price Information Service, to tell CNBC's Futures Now that the market is so volatile a slump of $50 or a spike above $100 is entirely possible.

He said tighter inventories at Cushing, Oklahoma, could cause WTI prices to rise above $70 in coming weeks, followed by geopolitical developments that would quickly take oil lower heading into November (Kloza blamed U.S. president Donald Trump, who he referred to as "meddler-in-chief", for making this scenario possible due to his resumption of sanctions against Iran).

Although Kloza added that the possibility of the sanctions removing over a million barrels of Iranian oil from the marketĀ  could then push oil prices higher again in November, the trend from a market perspective is one of persistent hedge fund liquidation.

According to John Kemp, energy and commodities analyst for Reuters, "liquidation over the last four months has weighed heavily on the oil market, both spot prices and calendar spreads, ending the previous rally and putting the cyclical upswing into a prolonged pause."

He pointed out that net long positions have been cut in 11 of the last 16 weeks, with a total reduction of 380 million barrels, or 27 percent, since April 24: "As in previous weeks, liquidation was concentrated in crude, with net positions in Brent cut by 18 million barrels and in ICE and NYMEX WTI by 9 million barrels.

"Fund managers remain fundamentally bullish on the outlook for oil prices, with long positions outnumbering short ones by a ratio of more than 10:1; but the hedge fund community has become more cautious since late April, when long positions outnumbered shorts by 14:1."

Kloza's forecast for crude closely matches that supplied last week by the International Energy Agency, which warned, "the recent cooling down of the market, with short-term supply tensions easing, currently lower prices, and lower demand growth, might not last."