Second Downed Drone Boosts Crude Prices, But Analysts Disagree On Market Conditions

Tuesday July 23, 2019

More price gains for crude were enjoyed on Tuesday based on reports that the U.S. shot down a second Iran drone over the Strait of Hormuz last week, with the perception of mounting geopolitical tension between the two nations fueling the idea of an impending global tightening - despite the prevailing worry only last week that the world was swimming in too much oil.

While sources are still trying to confirm the claim, a U.S. official told Reuters on the condition of anonymity that the U.S. warship Boxer may have brought down a second drone last week after it threatened a Navy ship.

Accordingly, Brent on Tuesday settled up 57 cents at $63.35 per barrel, while West Texas Intermediate settled up 55 cents at $56.43.

Traders fears of a significant supply disruption eclipsed news on Tuesday that the International Monetary Fund cut its forecast for global growth, warning that further U.S.-China tariffs or a disorderly exit for Britain from the European Union could weaken investment and disrupt supply chains.

Not all analysts had forgotten last week's concerns to the contrary, however: Robert Yawger, director of energy futures at Mizuho, remarked, "We're oversupplied big here in the United States, and the global demand situation is not all that good."

Also defying the notion that the market is about to tighten was John Kemp, market analyst for Reuters, who on Tuesday wrote that "Global oil consumption has stalled since the middle of 2018, making lower oil prices inevitable despite the best efforts of Saudi Arabia and its allies to reduce production."

He pointed out that consumption in the top 15 oil-consuming countries, which account for 45 percent of world consumption, fell 2.2 percent in the three months to May compared with 2018, "the fastest decline since the recession of 2008/09."

Avoiding talk of geopolitical tension entirely, Kemp concluded that "Prices will start to rise sustainably if, and only if, the global economy avoids recession and consumption growth starts to accelerate again.

As for the immediate future, Bill Baruch, president at Blue Line Futures, noted that in the Middle East "tensions are ever-present but it hasn't moved the market much because everyone is waiting on U.S. supply data."

He was referring to the possibility that crude may gain further support if analytical forecasts for a 3.4 million barrel draw in U.S. inventories in the latest week proves true.