Wildly Wrong Forecast Causes Crude Prices to Rebound, But Worry Over China Persists

Analysts now believe prices will drop to the $60s because of Iran: File Image/PixaBay

Leave it to the unreliability of polls and forecasts to suddenly turns things around for crude prices: after predictions of a U.S. inventory buildup contributed to a substantial loss for the commodity on Tuesday, prices on Wednesday rose 1 percent after it was revealed that inventories had actually fallen.

The Energy Information Administration on Wednesday reported that U.S. crude inventories fell 4 million barrels last week, a far cry from a Reuters poll predicting a 1.2 million barrel build; as a result, Brent rose 49 cents to settle at $70.37 per barrel, while West Texas Intermediate settled up 72 cents at $62.12.

However, the analytical community on Wednesday was still fretting over the main impetus for Tuesday's losses, namely, the escalating trade dispute between the U.S. and China (which is perceived will slow economic growth and therefore cause crude demand to plummet), and this helped put a cap on the gains.

Jim Ritterbusch, president of Ritterbusch and Associates, remarked, "The [latest] crude data removes a bearish consideration in our view that had accommodated the heavy WTI liquidation phase of the past couple of weeks."

Just as it seems virtually impossible even for the experts to make accurate predictions about inventory numbers, it's equally impossible to determine if geopolitical or other events will cause traders to raise or lower crude prices - but it's reasonably safe to forecast that Iran will continue to weigh heavily on sentiment in the days and weeks to come.

On Wednesday, U.S. president Donald Trump ordered new sanctions placed on Iranian iron, steel, and aluminum, Tehran's largest non-petroleum-related sources of export revenue; it also reiterated that it would not grant sanction waivers to any countries buying Iranian oil - a disclosure that came hours after the Islamic republic announced it was relaxing some restrictions on its nuclear program.

For his part, Abhishek Deshpande, head of oil market research & strategy at JP Morgan, told CNBC television that the drop in Iran oil production has not yet been priced into the market, and that this combined with the ongoing strife in Venezuela (offset somewhat by Russia itching to resume higher levels of production) will result in prices of $69 for Brent and $61 for WTI at end of year.

However, Deshpande conceded that the Organization of the Petroleum Exporting Countries (OPEC) had built up 3.3 million barrels of spare capacity via its output cuts, and that this would probably make up for any serious supply shortfalls in the near future.