Crude Prices Retreat on Friday, But Analysts Predict Major Supply Shock

Experts can't imagine global producers being able to compensate for Iranian and Venezuelan crude losses. File Image / Pixabay

Repeating the pattern of past weeks, crude prices on Friday ended the week down by 0.4 percent for West Texas Intermediate and 1.5 percent for Brent, this time in reaction to China state oil major Sinopec cutting its purchases of U.S. product due to the trade spat between both countries.

WTI settled down 47 cents to $68.49 per barrel, and Brent fell 24 cents to $73.21 per barrel, causing Jim Ritterbusch, president of Ritterbusch & Associates, to remark, "It's a jittery feel here, as long as we have Iranian sanctions uncertainty and tariff uncertainty, and it doesn't take much to spark a significant swing one way or the other."

Interestingly, China has also rejected a U.S. request to cut imports from its biggest customer, Iran, for the sake of fulfilling U.S. president Donald Trump's objective of achieving a complete halt of outgoing Iranian crude supplies; China's rejection would presumably lessen the chance of a market tightening that many analysts are still worried about and consequently help keep prices relatively low - which is what Trump was demanding from the Organization of the Petroleum Exporting Countries (OPEC).

Meanwhile, the tensions between Washington and Beijing is scaring hedge funds away from an increasingly volatile oil market, according to Bloomberg, with money managers' total positions in the U.S. benchmark and Brent having slid to the lowest since 2016.

Tamar Essner, an analyst at Nasdaq Inc., said there are "no signs whatsoever that this trade war is going to clear up anytime soon," and that has  "caused investors to continue to trim net length, take profits, and de-risk that position with the sense that oil's upside is limited unless there's material reduction in Iranian barrels."

But as Ritterbusch indicated, jittery traders could send prices in one direction or another based on whatever analytical theory makes headlines, and on Friday Helima Croft, global head of commodity strategy for RBC Capital Markets declared that the oil market will tighten shortly.

She told CNBC with regards to the U.S. sanctions against Iran kicking in next week, "we're looking at tougher rhetoric and potentially tougher actions over August and September."

She added that while China may not cut Iranian oil imports, it did not indicate that it will increase imports either, raising the question of whether or not there will be 1 million barrels per day of Iranian oil take off the market by the end of this year and whether OPEC can make up for the shortfall.

When pressed by CNBC to answer the questions she was raising, Croft replied, "I think this market will tighten at the end of this year," and added that Venezuelan production continues to fall and will be a contributing factor.

Another expert who foresees tightening was far more outspoken in his short-term forecast: Stephen Brennock, oil analyst at PVM Oil Associates, stated in a note on Friday that "Venezuela's ticking time bomb together with the return of Iran's oil industry to the sanctions era has all the makings for a major supply shock.

"The rising tide of global supply outages will offer a lifeline to those of a bullish disposition, (and) the potential for another price spike cannot therefore be discounted."

CNBC reported that "industry analysts" believe prices could soon rally about $90 per barrel.

Peeved Iranians aside, many Middle Eastern countries have repeatedly stated - much to the skepticism of analysts - that the crude market will be just fine thanks to their enormous production capabilities, and the latest country to state as much was Kuwait, whose oil minister Bakhit al-Rashidi said earlier this week that "we are approaching a very stable stage...whether for the consumers or the producers."