Crude Falls Again as Market Faces a "Tidal Wave" of Supply

Monday saw the U.S. sanctions against Iran formally imposed, but instead of indications of massive global crude shortages there was talk of a "tidal wave" of supply, which helped cause prices for U.S. crude to fall yet again, to a 7 month low.

West Texas Intermediate ended Monday's session 4 cents lower at $63.10 per barrel, but Brent enjoyed a slight comeback, rising 34 cents to $73.17 per barrel; however, both benchmarks have slid more than $13 a barrel since hitting four-year highs in early October.

Bob Yawger, director of futures at Mizuho, stated the obvious regarding the market performance: "We're not getting the price rally that many participants thought they were going to get out of the Iran sanctions situation."

That's possibly because the U.S. last week granted eight countries temporary waivers allowing them to keep buying oil from the Islamic Republic, and because, despite what many experts have insisted, all indications are that major producers such as Saudi Arabia and Russia are pumping at near record levels with apparently much more to give if required, thus compensating for much of the losses of Iranian oil on the international market.

That much was admitted by Reuters, one of many news agencies that has spent the summer of 2018 stoking fears about market tightening: it now believes that the output levels combined with "recent weak economic reports out of China and other emerging markets, have shifted the conversation back toward worries about oversupply."

Supporting this view was Jim Ritterbusch, president of Ritterbusch & Associates, who remarked, "The magnitude of recent selling is strongly suggesting that global oil demand is weaker than expected as a result of tariff issues, especially between the U.S. and China."

There is also the sense, however, intangible, that world tensions are easing, with some taking solace in the fact that although the trade war between the U.S. and China still rages, pundits are somewhat confident it will come to a satisfying conclusion, and that as bellicose as U.S. president Donald Trump may be, he still included China in the group of major buyers of Iranian crude to which he granted sanction waivers.

Arguably, there may also be a sense among crude traders that the world view as reported by media doesn't always correlate with reality, to wit: while much has been made of China's disappointing economic growth of late and a significant cause of reduced demand for oil, it remains a powerhouse producer - as witnessed by news on Monday that Sinopec and CNPC are speeding up drilling and exploration from major tight and shale oil and gas formations in the country's western regions to boost domestic output.

Sinopec said it will tap 66 new natural gas wells and install 23 gas drilling stations over winter to increase supplies from its fields in southwestern China; and CNPC reportedly increased spending in its upstream sector this year.

China this year is also expected to overtake Japan as the top buyer of liquefied natural gas.

Despite crude's downturn, Goldman Sachs last week said there was still plenty of reasons to be bullish about the commodity, including the bank's stubborn insistence that inventories are beginning to tighten and the worst impact of the Iranian sanctions are yet to be felt.