Crude Falls Again on More Evidence of Slowing Demand and Output Capability

Iran demands that OPEC members stop trying to produce above their limit. File Image / Pixabay

The gains made by crude earlier this week increasingly seem to be a mere anomaly of a downward-trending pattern that saw prices fall again on Thursday, based on doubts about the strength of oil demand going forward as well as the notion - contrary to what many analysts insist - that global supply will be able to meet any requirements in the foreseeable future.

West Texas Intermediate fell 13 cents to $66.81 per barrel - marking a seven-week low - while Brent dropped 30 cents to $71.98 per barrel.

Once again, the trigger was the escalating U.S.-China trade dispute, which is causing traders to think the tariffs and counter tariffs will have a negative overall impact on the economies of both countries and therefore put a cap on crude demand.

Signs of slowing demand are numerous: while crude imports to China picked up in July after two months of decline, they were still among the lowest this year; also, Iraq on Thursday cut its official selling price for September cargoes of Basra Light crude for its Asian customers.

John Kilduff, founding partner at Again Capital, seemed to appreciate the fundamental shift in sentiment that influences crude prices when he stated that previously the market had been "racing higher" due to a fear of scarcity, but those concerns have receded and "supply is seen as sufficient to meet the pretty robust demand picture."

But those who insist the market will soon tighten due to U.S. sanctions against Iran taking as much as 2 million barrels per day (bpd) off the market (combined with what they think is the inability of powerhouse producers such as Russia, Saudi Arabia, and the U.S. to make up for the shortfall) are loudly maintaining their position.

Tamas Varga, analyst at PVM Oil Associates, said with regards to the sanctions targeting Iranian oil in November, "The impact of it is the greatest known unknown of the year: if worst comes to worst and 1.5-2 million bpd of Iranian disappears from the market ... calculations will go out of the window and oil bears will have to brace themselves for a very rough ride."

And this degree of calamity is precisely what beleaguered Iran would presumably love to see happen, which might explain why Bijan Zanganeh, oil minister for the Islamic republic, complained to the Organization of the Petroleum Exporting Countries (OPEC) that Saudi Arabia is planning to boost its output above targeted levels and other members are trying to upwardly adjust their output.

Zanganeh said that unless the situation is resolved it "should be raised at an extraordinary meeting of the OPEC conference for decision-making," but one OPEC source told media "There is no need."

Thursday also saw a softening of a far less serious geopolitical issue than China or Iran thanks to the very nature of the dispute, supplied by mild-mannered Canada, whose federal government's idea of confrontation was to recently demand the release of jailed rights activists in Saudi Arabia.

Ottawa's stance prompted Riyadh to freeze new trade with Canada and expel the Canadian ambassador, but Khalid al-Falih, oil minister for the Saudis, stated on Thursday that the dispute will not affect oil exports to the Great White North.

Despite so much evidence that crude supplies are healthy and global producers are more than capable of pumping full out, Energy Aspects is one of several notable organizations that is convinced prices will go into the $80s and potentially even into the $90s by the end of this year due to Iranian oil being taken off the market.