Crude Down Again, But Driscoll Thinks Market Weakness Has Been "Oversold"

Inventory draws are steady and the U.S. rig count is down, he argues: File Image/Pixabay

Data showing that U.S. manufacturing activity in August contracted for the first time in three years was enough to cause traders to maintain their recent bearish stance and send crude prices on Tuesday downward yet again.

West Texas Intermediate fell $1.16, or 2.1 percent, to settle at $53.94 per barrel, while Brent lost 40 cents, or 0.7 percent, to settle at $58.26 per barrel.

News of the manufacturing contractions came on the heels of earlier, separate data showing that Euro zone manufacturing activity contracted for a seventh month in August; this in turn fed into prevailing fears that the U.S./China trade war was responsible for the economic downturn.

This was despite U.S. president Donald Trump on Tuesday stating that trade talks between the two countries were going well, though he warned he would be "tougher" in negotiations if discussions drag on until his second term (for his part, Liu He, vice premier of China, said his country firmly opposes a trade war).

Rhetoric aside, it seems the crude market is firmly entrenched in what John Kemp, commodities analyst for Reuters, described on Tuesday as a "neutral" position: he noted that hedge funds and other money managers were small net sellers of petroleum futures and options last week for the third time in the last four weeks, and that fund managers sold 26 million barrels in the six most important futures and options contracts, reducing their net long position to 525 million barrels in the week to August 27.

Kemp wrote, "Hedge fund managers are currently running a dynamic net long position of just 35 million barrels, down from a recent peak of 420 million in April.......until economic uncertainty is resolved, either with clearer signs of recession or indications of renewed growth, portfolio managers are likely to remain on the sidelines."

As always, at least one expert was on hand to question why the market is mired in pessimism: John Driscoll, director at JTD Energy Services, told CNBC television that "if you look at the inventories, they've been steadily drawing.....and fewer drilling rigs are being deployed [in the U.S.] for the past nine months, so there are signals suggesting that the supply could tighten.

"Arguably, maybe this weakness has been overdone somewhat; my own view is that we may bounce back, maybe even breach $60 going back up."