Economic Worries - Not Iran - Cause Steepest Weekly Loss For Crude Since May

Friday July 19, 2019

Once more, crude trading on Friday demonstrated that skyrocketing tensions between the U.S. and Iran are no match for overstated concerns about waning demand and oversupply, as West Texas Intermediate dropped 7 percent for the week and Brent lost about 5.5 percent for the week, the steepest losses for both benchmarks since late May.

Traders seemed to take in stride reports that Iran's Revolutionary Guards claimed to have captured a British-flagged oil tanker off Iran's coast after Britain seized an Iranian vessel earlier this month: this only partly offset steep losses earlier in Friday's trading session caused by news of the International Energy Agency reducing its 2019 oil demand growth forecast to 1.1 million barrels per day (bpd) from 1.2 million bpd due to the U.S.-China trade spat.

In the end, Brent on Friday settled up 54 cents at $62.47 per barrel and WTI rose 33 cents to $55.63 per barrel - hardly enough to counterbalance continuous losses earlier in the week.

Jim Ritterbusch, president of Ritterbusch and Associates, summed up trading by stating in a note,  "Our opinion of the complex still favours some wide swinging trade in both directions as pricing continues to be buffeted by an array of cross currents that include a heightening of tensions between the U.S. and Iran on the bullish side and mounting global oil demand concerns on the bearish side."

Warren Patterson, head of commodities at ING, added, "Macroeconomic concerns, uncertainty on trade discussions and increasing oil supply from the U.S. continued to weigh on sentiment."

But traders worried about a world swimming in oil with less and less demand seem doggedly determined to not be swayed by news that should by all counts please them, such as U.S. energy firms this week reducing the number of oil rigs operating for a third week in a row.

Drillers cut five oil rigs in the week to July 19, bringing the total count down to 779, the lowest since February 2018, according to Baker Hughes.

Data on Friday also showed hedge funds and other money managers raising their bullish wagers on U.S. crude - the second consecutive increase.

So, what would cause oil prices to shoot up?

Analysts at Capital Economics said in a research note, "If war were to break out [between the U.S. and Iran], we estimate that the price of oil would quickly surge to around $150 per barrel following the outbreak of hostilities."

But even that dramatic scenario would only be fleeting: Helima Croft, global head of commodity strategy at RBC Capital Markets, agreed that prices would spike, but that it would only be temporary.