Crude Up Once Again on Perception that Oil Market is Tightening

Wednesday September 19, 2018

Fear and uncertainty ruled the crude market once again on Wednesday, culminating in another substantial jump in prices - this time by 1.8 percent - mainly on the strength of depleting U.S. stockpiles.

The Energy Information Agency on Wednesday reported that crude inventories fell 2.1 million barrels in the week to September 14 to 394.1 million barrels, the lowest level since February 2015; and even though analysts had forecast a decrease of 2.7 million barrels, the news was enough to kindle traders' fears of a global market tightening.

As a result, West Texas Intermediate settled up $1.27, or 1.8 percent, at $71.12 per barrel, its best closing price since early July; Brent added 37 cents to close at $79.40 per barrel.

The EIA data also revealed that gasoline stocks fell 1.7 million barrels versus forecasts for a 100,000 barrel drop, and this prompted John Kilduff, founding partner at Again Capital Management, to remark, "The summer-like demand from drivers is proving unrelenting" - a reference to the fact that gasoline consumption usually wans in autumn.

Meanwhile, overseas demand for U.S. oil expanded for a second week while impending sanctions curbed orders for Iranian crude, which caused Michael Lynch, president of Strategic Energy & Economic Research, to observe that "We're near the top of the bull market; that relatively strong inventory report has made people worry more about oil supply this fall and winter."

But it's questionable whether those fears are justified, and what is frustrating for many people who view the recent crude gains as bad rather than good news is that so much of the upward momentum seems to be based on overreaction: for example, crude prices on Tuesday escalated after media reported that Saudi Arabia was comfortable with prices above $80, yet on Wednesday JBC Energy cautioned that "It may well be that too much attention is being put on these indirect anonymous statements."

That said, there's no indication that trading patterns will change fundamentally anytime soon, and as if to supply the next reason for a crude price jump, Mohammad Barkindo, secretary general for the Organization of the Petroleum Exporting Countries (OPEC), told delegates at an event in the United Arab Emirates that his cartel is concerned by threats to crude supply from Iran.

He called Iran a "very important producer and exporter" of oil and that "when you have major producers facing supply challenges, it's of concern" for OPEC and consumers alike.

Presumably, jittery traders could take solace in remarks made by Moayyed Hosseini Sadr, an adviser to Bijan Zanganeh, oil minister for Iran: he said on state television that "Considering the high demand and low supply in the market, America's sanctions cannot drop Iran's oil sale to zero" - which implies that crude prices could stay relatively stable, if rhetoric from the Islamic republic is to be believed.

Meanwhile, it's anyone's guess what effect Zanganeh's latest headline-grabbing initiative may have on the trading community: an oil ministry spokesman told media that "Zanganeh will not attend the meeting in Algeria; he has changed his mind."

The minister had earlier said he would attend this month's meeting of OPEC and non-OPEC states, during which the organization's oil output would be discussed.

Of course, media misinterpretations don't help clarify matters for traders either: earlier this week it was widely reported that the Saudis were "comfortable" and even "happy" with $80-plus oil when no such descriptives were uttered by the anonymous sources reporting the news; Stuart Wallace, a reporter for Bloomberg, belatedly attempted a more plausible spin by theorizing that "Maybe there's very little they can do to stop [oil] from, popping above $80; that doesn't mean they like it, they're aware that this is in the danger zone, but it also means that they're not going to panic every time it gets to $80."