Stock Build and China Signing Delay Spook Traders, Cause 1.5% Crude Price Drop

However, geopolitical tensions over Iran could cause a risk premium surge: File Image/PixaBay

As if to demonstrate Saudi Arabia's long-held claim that the crude market is myopically fixated on ephemeral short-term events, prices on Wednesday fell 1.5 percent due to a surprise build in U.S. inventories and reports that the signing of a new U.S./China trade deal could be delayed by several weeks.

Even though a preliminary deal seems like a fait accompli, news that discussions about terms and where a signing should take place could postpone a deal ratification until December caused Brent to fall $1.22, or 1.9 percent, to settle at $71.74, while West Texas Intermediate lost 88 cents, or 1.5 percent, to settle at $56.35 per barrel.

John Kilduff, founding partner at Again Capital, remarked, "The crude market is much more skeptical about a deal," and he added that with further issues between the two countries oil prices are not going to rise now: "It's tough to surmount."

And even though stock builds tend to disappear just as quickly as they suddenly appear, traders were spooked by the disclosure from the Energy Information Administration that U.S. crude inventories rose by 7.9 million barrels in the week to November 1, compared with analysts' expectations for a  1.5 million barrel increase.

By contrast, gasoline stocks dropped by 2.8 million barrels, compared with a forecast of a 1.8 million-barrel drop, and distillates shed 622,000 barrels, versus expectations for a 949,000 decline.

Wednesday also saw the type of bad news/good news report that tends to mitigate losses, ie: word that Iran started to inject uranium gas into centrifuges at an underground nuclear facility, thus further violating the nuclear deal between the Islamic republic and world powers.

In fact, Stephen Brennock, analyst at PVM, suspects Iran's renegade behaviour could inject some life into the somewhat range-bound crude market: "The OPEC nation may be tempted to cause further supply disruptions in the Middle East in a bid to drive up prices; accordingly, conditions are ripe for tensions in the region to escalate and for the geopolitical risk premium to strike back with a vengeance."

Another factor that could influence trading in coming days is the rumour from unnamed sources that the Organization of the Petroleum Exporting Countries (OPEC) will not push for deeper oil supply cuts when the cartel meets next month; instead, it is said it will encourage members to comply more fully with current output targets, in a bid to mitigate the effects of an expected supply glut in the first half of next year.