Oil Dips As Brent's Paper Market Is "Net Short" For First Time In History

The rising U.S. rig count also played into demand fears: File Image/Pixabay

Oil prices on Friday dipped in a tepid session of trading, after the media fears of Hurricane Francine proved to be overblown and crude production in the Gulf of Mexico was scheduled to resume.

Brent settled down 36 cents at $71.61 per barrel, and West Texas Intermediate settled down 32 cents at $68.65 per barrel.

Jim Ritterbusch, president of Ritterbusch and Associates, said of the nearly 42 percent of production that had been suspended in the Gulf, "These cuts are expected to prove brief and within the broader context are unlikely to spur much movement in the crude balances given the importance of shale production that accounts for the major portion of U.S. output."

Traders, who have been motivated primarily by worries of weak demand of late, also took note of a weekly rise in the U.S. rig count: Baker Hughes reported that the rig count rose by eight in the week to Sept. 13 to 590, the biggest increase since the week to Sept. 15, 2023 (of that figure, crude oil rigs rose by five to 488 this week).

Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, told media that oil over the past few weeks has sold off to levels far below what fundamentals would suggest; and while demand in China has been week, the problem is that the financial demand for oil is weak, "as evidenced by net speculative length at its lowest level in history."

He also said that global physical demand remains solid, even though it is growing less than originally hoped.

Nuttall went on to note that for the first time ever, the paper market for Brent crude is "net short," meaning there are more investors betting on continued falling oil prices than those expecting them to rise – a troubling development especially considering that physical global oil inventories are falling at a rate of about 1 million barrels per day.

Meanwhile, a development in the week ahead that is sure to influence crude trading is the U.S. Federal Reserve, which next Wednesday is widely expected to announce long-awaited interest rate cuts – although persistent signals sent by the Fed throughout this year is that the cuts will be minimal, which could merely stoke the bearish sentiment weighing down the market.