U.S. Crude Plummets 3.2 Percent on Higher Than Expected Stockpiles, Fear of Waning Demand

Wednesday August 8, 2018

Yet another dramatic change of course marked Wednesday's crude market, with traders who had caused prices on Monday to escalate due to fears of a global oil depletion now causing U.S. crude to drop a massive 3.2 percent, in reaction to the U.S. trade dispute with China and news of weak Chinese import data plus a smaller than expected drop in American crude stockpiles.

West Texas Intermediate plummeted $2.23 to $66.94, a seven week low, while Brent fell $2.40 to $72.25 per barrel.

China's threat on Wednesday to impose a 25 percent tariff on $16 billion of U.S. goods was said to exacerbate familiar concerns that global economic growth will slow, lowering demand for crude oil in the process.

This was accompanied by a disclosure that U.S. crude inventories fell by only 1.4 million barrels in the week through August 3, in sharp contrast to a Reuters poll that had expected stocks to drop by 3.3 million barrels and an earlier report from the American Petroleum Institute that forecast a fall of 6 million barrels; gasoline and distillates stockpiles also rose more than expected.

As has been the case with recent crude price plunges, Wednesday's market performance illustrates yet again not only how unreliable the best forecasts of respected analysts can be, but also how quickly sentiment can suddenly shift from worry over global supply tightening to fears of a return to surplus, based solely on media headlines (such as the threats and counter-threats between the U.S. and China) that astute political scientists would deem entirely predictable.

Still, the experts insist that market tightening is inevitable: Amrita Sen, chief oil analyst at Energy Aspects, told CNBC's 'Squawk Box Europe', "As we go more towards (the fourth quarter) … that's when we really see the risk of prices going well into the $80s and potentially even into the $90s but very critical is how much Iranian production we lose," referring to the U.S. sanctions on Iranian crude.

Somewhat more conservative in his forecast was Sushant Gupta, research director for Asia refining at Wood Mackenzie, who thought oil will hover at around $75 because of extra production from Saudi Arabia and other countries in the fourth quarter.

Gupta also conceded that expectations of slower global oil demand growth next year were indicative of a loosening in the oil markets towards the end of this year and going into 2019.

Wednesday also saw more predictable rhetoric coming from Iran, this time from the country's foreign minister Javad Zarif, who said of the U.S.'s aim to reduce Iran's oil sector to zero, "If the Americans want to keep this simplistic and impossible idea in their minds they should also know the consequences…they can't think that Iran won't export oil and others will export."

Zariff seemingly failed to appreciated that U.S. president Donald Trump is typical of hawkish leaders in that aims are set high and private expectations are kept lower; and while crushing Iran's industry may be impossible, the sanctions against the Islamic republic are having a tangible effect in the Americans' favour, the latest evidence being news that Indian Oil Corp has bought 6 million barrels of U.S. crude for delivery in November to January, according to a company official.

Sri Paravaikkarasu, head of East of Suez Oil at FGE, remarked, "We think India will continue to buy U.S. oil given the strength in U.S production and the Indian market can emerge as a reliable buyer of U.S. oil."

Earlier this week, Michele Della Vigna, head of energy industry research at Goldman Sachs International, worried that "We are going into a very, very tight oil market" and added that declining production in Venezuela and Libya is evidence that "we're heading into a slowing period of supply growth."