Crude Rises Again But Market Signals More Conflicting Than Ever

Experts are completely unable to agree upon what will happen with China and Iran. File Image / Pixabay

Although it's far too early to determine if crude is heading into a genuine rally that defies prevailing analysis, prices for both benchmarks on Tuesday rose for a fourth straight session, supported by the prospect of lower production supply from Iran but tempered by the continuing worry of a demand slowdown due to the U.S.-China dispute.

West Texas Intermediate jumped 92 cents, or 1.4 percent, to end the session at $67.35 per barrel, while Brent rose 51 cents to $72.72 per barrel.

The market is particularly vulnerable - and virtually impossible to forecast with any clarity - due to a host of signals supporting the conflicting notions that the market is either robust or set to tighten.

For example, on one hand observers are bracing for lower Iranian oil supply due to the U.S. sanctions, but on the other China has indicated it will continue to purchase Iranian crude; on one hand, domestic production seems healthier than ever with the Syncrude facility in Canada resuming output far sooner than expected, but on the other total U.S. stockpiles were forecast to have drawn down about 1.5 million barrels last week, supporting fears of a tightening market.

More conflicting signals came Tuesday, when BNP Paribas said it expected oil production from the Organization of the Petroleum Exporting Countries (OPEC) to fall from an average of 32.1 million barrels per day (bpd) in 2018 to 31.7 million bpd in 2019 - thus putting into question the cartel's persistent claims it will be more than able to compensate for any production shortfalls due to countries such as Iran and Venezuela (although it was also reported on Tuesday that oil exports from southern Iraq are on course to hit another record high this month, supporting the notion of OPEC  raising output as promised).

Yet another conflicting signal for analysts who were buoyed by news of China and the U.S. agreeing to discuss their differences later this month was issued Tuesday, when Jim Ritterbusch, president of Ritterbusch and Associates, said in a note, "The upcoming U.S.-China trade talks are unlikely to offer any significant breakthroughs as more formal discussions and, hence, decisions will likely await expected talks in November between (Donald) Trump and Xi (Jinping)."

Unsurprisingly, another analyst was on hand Tuesday to reiterate the opposing view: "The fact that there are negotiations beginning that probably ultimately come to some resolution on this are a positive," said Rob Thummel, portfolio manager at Tortoise Capital, adding that "The de-escalation rather than the escalation of trade wars will be a benefit."

The one indisputable news item on this slow trading week is that the bullish sentiment which fueled remarkable gains for crude earlier this year has all but vanished: Reuters reported that net length in Brent has fallen to its lowest level for 55 weeks and close to the lowest long positions in 24 months, unwinding most of the increase since prices started to rise in July of 2017.