Crude Traders Now Fear Supply Tightening Despite "Benign" Market Forecast

Monday July 22, 2019

If last week's crude trading was dominated by fears that the world is swimming in too much oil with too little demand, Monday's session saw fickle traders suddenly turn tack and worry about supply disruptions in the Middle East due to hostilities between Iran and the West.

Their cause for concern was a delayed reaction to Iran's Revolutionary Guards claiming on Friday to have captured a British-flagged oil tanker off Iran's coast after Britain seized an Iranian vessel earlier this month; as a result, Brent on Monday climbed 79 cents, or 1.3 percent, to settle at $63.26 per barrel, while West Texas Intermediate settled up 59 cents, or 1.1 percent, at $56.22 per barrel.

Gene McGillian, vice president of market research at Tradition Energy, noted, "Some of the selling pressure from demand concerns seems to have evaporated this week; the fears about geopolitics seem to have halted some of that selling pressure."

Capping Monday's gains, however, was a report that a force majeure was lifted on crude loadings at Libya's Sharara oilfield; the closure since Friday had caused an output loss of about 290,000 barrels per day (bpd).

Still, while crude trading is living up to its reputation for being volatile and somewhat irrational, Martijn Rats, global oil strategist for Morgan Stanley, predicted that supply growth will keep crude futures relatively subdued in coming months despite the increasing sabre-rattling between Iran and the U.S.

He told CNBC, "The history of fear around the Strait of Hormuz suggests that from time to time, this concern can flare up and we can have some disruptions, but they rarely last for very long.

"There is a difference in the oil market this time around, because non-OPEC is simply growing so fast; that is the real game changer and that's why the price action is relatively benign."

Rats noted that supply from sources other than the Organization of the Petroleum Exporting Countries (ie: the U.S.) would rise by more than 2 million bpd this year and to 2.4 million bpd in 2020, "a very significant number because it vastly exceeds global demand growth."

Geopolitics and perceptions of the economy notwithstanding, hedge funds and other money managers bought the equivalent of 84 million barrels in the six most important petroleum futures and options contracts in the week to July 16, the largest weekly increase since August 2018.

John Kemp, market analyst for Reuters, pointed out that "portfolio managers have bought 125 million barrels of crude and fuels in the last four weeks, after selling 389 million barrels over the previous eight weeks."

He went on to say that, "For now, most fund managers appear to have concluded the balance of risks has shifted firmly towards the upside," and he added that if the U.S. Federal Reserve cuts interest rates at the end of this month, it "should help boost global economic growth and oil consumption over the next 12-18 months, provided the global economy avoids recession."