Market Tightness, Demand Ignored As China Concerns Again Cause Oil Price Declines

But Royal Bank analysts believe market tightness is "artificial": File Image/Pixabay

Crude traders on Thursday succumbed to their familiar concerns over China’s challenged economy, overlooking yet more signs of strong demand and causing oil prices to decline, albeit minimally.

Brent settled down 68 cents at $89.92 per barrel, while West Texas Intermediate settled down 67 cents at $86.67 per barrel.

Bloomberg in the previous session pointed out that, “crude is flashing warnings that it is overbought on a 14-day Relative Strength Index basis, raising the risk of a pullback.”

Concerns over China were rekindled by data showing that overall exports fell 8.8 percent in August year on year and imports contracted 7.3 percent; curiously, the fact that crude imports surged 30.9 percent in the same time frame seemed to have no impact on jittery traders.

For the record, in the first seven months of this year, China’s crude oil imports rose by 12.4 percent, hitting 122.4 million tons.

The same indifference was exhibited to data from the Energy Information Administration showing that U.S. crude stockpiles declined for a fourth consecutive week by 6.3 million barrels last week, and down over 6 percent in the last month; the drains were attributed to refineries running at high rates to keep up with global energy demand.

Crude investors also apparently felt that rising oil output from Iran and Venezuela could potentially mitigate extended cuts by Saudi Arabia and Russia; this sentiment gained credence when news broke on Thursday that U.S. authorities seized nearly 1 million barrels of Iranian oil that were being illegally smuggled to China earlier this year.

However, Bloomberg noted that Iran’s soaring oil exports following secret diplomacy with the U.S. are likely to fall for the rest of the year as post-summer demand in Asia declines.

Leon Li, analyst at CMC Markets, said, "At present, it is really difficult for us to see any negative factors due to supply constraints; however, we need to consider possible demand risks such as in the fourth quarter, the market could slow into an off peak season for oil consumption after summer demand ends."

Royal Bank of Canada analysts including Michael Tran and Helima Croft said in a note that the actual structure of the market needed to be considered; referencing the Saudis, they wrote,  “While some can argue that messaging from the kingdom earlier this week is a stark reminder to short sellers to not position against the Central Bank of oil, some may argue that the recent physical market tightness is artificial rather than organic market forces at work.”