Crude Soft as Fears of US-China Trade War Abates

Losses on Wednesday were also minimized by a surprise draw in U.S. stockpiles. File Image / Pixabay

A surprise drop in U.S. crude stockpiles and other factors prevented an all-out drop in oil prices on Wednesday, with West Texas Intermediate settling 14 cents lower at $63.37 per barrel and Brent losing just 5 cents to end at $68.07 per barrel - however, analysts worry about a dearth of buyers moving forward if selling pressure continues, due to the net long/short position in futures and options being so skewed.

Defying expectations of a 246,000 barrel increase in stockpiles, the Energy Information Administration early Wednesday released data showing U.S. crude inventories fell by 4.6 million barrels in the latest week thanks to strong demand and a high level of oil exports of over 2 million barrels per day (bpd).

The market was also aided by an emerging consensus that the trade spat between China and the U.S. either might not be as bad as media headlines suggest or could fizzle out altogether: "There's a growing belief this is brinksmanship and posturing and the likelihood of us seeing a trade war is pretty small," said Robert Phipps, a director at Per Stirling Capital Management.

Michael Arone, chief investment strategist at State Street Global Advisors, agrees that the market overreacted when the so-called 'war' was first announced last week: "These tariffs won't be implemented for a little while," he said of China's recent retaliatory measures against America's get-tough stance, adding, "it gives both sides time to negotiate, which I think is the strategy for both the U.S. and China."

Anindya Chatterjee, lead portfolio manager of emerging markets at Fiera Capital, said, "we maintain that an escalation of a tariff war is unlikely."

Presumably traders are still buoyed by Alexander Novak, energy minister for Russia, declaring that a long-term relationship with the Organization of the Petroleum Exporting Countries (OPEC) is possible after the expiration of the cartel's production cut initiative later this year.

He said, "There are various cooperation formats, ranging from periodic meetings of OPEC and non-OPEC countries to other formats, probably, of an organization that could cooperate with OPEC and non-OPEC states" - however, he stressed that Moscow has no plans to join the cartel.

While Wednesday's crude market performance could have been a lot worse, many experts think tough times are ahead for oil, and one of them, Ole Hansen, head of commodities strategy at Saxo Bank, is worried that the net long position in futures and options now tops 600 million barrels of oil, meaning that in the event of a sharper drop in price, sellers may find a dearth of buyers.

He said, "What's really the main worry is that the long/short ratio is so skewed, meaning who is going to be buying if there is a lot of selling pressure?"

Of course, many other developments could cause market chaos in the near term, including the prospect, voiced by ETF Securities earlier this week, that escalating tension between Saudi Arabia and Iran could ruin OPEC's unity and bring about the collapse of its cutback strategy.