Expect A Bounce In WTI Prices

Oilprice.com

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We are still in a period of headline risk in financial markets generally. Stocks, bonds and currencies are all reacting to news on subjects as diverse as trade, North Korea, and Italian politics. Neither Italian political turmoil nor an on again, off again relationship with North Korea are anything new, but the prospect of an escalating trade war has traders in every market worried.

The bond and currency markets are reacting as you might expect, with the U.S. 10 Year yield falling and the Dollar gaining ground as the “risk-off” trade gathers pace.

Both have seen a bounce off obvious levels, 95 for the Dollar Index and 2.75 for 10 Year yields, but for now the trends remain intact.

Stocks are a different story. U.S. equities are holding up remarkably well and remain close to the top of an upward recovery channel that has been in place since April. The feeling seems to be that healthy corporate profits and reasonably strong economic data trump (if you’ll forgive the pun) the headline risks.


Geopolitics:

As always, geopolitical risk as it relates to oil is focused on the Middle East. The Trump administration seems to have picked a side in the ongoing conflict between Saudi Arabia and Iran, increasing the risk of the proxy wars between the two rivals in Yemen and Syria growing into full-blown open warfare. However, with the Saudis now getting U.S. support they will probably be content to wait and see the effects of renewed U.S. sanctions and, as this article at foreignpolicy.com posits, that also makes aggression from Iran far less likely.

All in all, more simmering looks more likely than a full blow-up so the upward pressure on oil that we have seen recently from the Middle East will fade into the background for a while.

The situation in Europe brings on a sense of déjà vu. It is eerily reminiscent of 2012, when the many announcements of the death of the European Union were somewhat premature. There is some risk here, but history suggests that this too shall pass.

Supply:

The geopolitical situation in the Middle East has, of course, been a major factor in supply considerations in recent days and while that has influenced WTI on several occasions, the main upward push has been in Brent. Even more fuel has been added to that by the OPEC led cuts in production have remained in place despite some reports of problems.

At the same time, six weeks of gains in the North American rig count and the conventional wisdom that U.S. and Canadian production are being, or will be, ramped up to compensate for reduced global supply. In reality though, the rig count steadied last week after six weeks of gains and the EIA numbers showed a larger than expected draw on inventories.

Demand:

The potential effects of a trade war loom large. The effectiveness of the OPEC led production cuts has been magnified by the improving prospects for global growth, and that is now at risk. However, this too comes under the category of headline risk. Consistency has not been a hallmark of the Trump administration so far, and there have already been several changes of tone of the tariff issue. Another could easily prompt a quick reversal in oil.

Technical Factors

The long WTI trade was getting increasingly crowded and once a reversal or correction came that made it likely that it would be fairly sharp. We are, however, now approaching the bottom of the long-term upward channel in place since last September, and some support around or just above the $65 level can be expected.

Oil holds gains as markets tighten amid OPEC cuts, Iran sanctions

CNBC

  • Oil prices held firm on Tuesday.
  • Ongoing production cuts by OPEC and looming U.S. sanctions against Iran have tightened the market.

A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.

Nick Oxford | Reuters
A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.

Oil prices held firm on Tuesday as ongoing production cuts by OPEC and looming U.S. sanctions against Iran tightened the market amid signs of ongoing strong demand.

Brent crude futures, the international benchmark for oil prices, were at $78.30 per barrel at 0432 GMT, up 7 cents from their last close and not far off a three-and-a-half year high of $78.53 a barrel reached the previous session.

U.S. West Texas Intermediate (WTI) crude futures were at $71.02 a barrel, up 6 cents and also not far off their Nov. 2014 high of $71.89 a barrel reached last week.

Markets have generally tightened as the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, has been withholding supplies since 2017 in order to push up oil prices.

With renewed U.S. sanctions looming against OPEC-member Iran, analysts said crude prices were well supported.

“The commitment of Saudi Arabia and the rest of OPEC to the production cuts is a major factor in supporting the price at the moment as well as the possibility of reduced exports from Iran due to sanctions,” said William O’Loughlin, investment analyst at Rivkin Securities.

How will higher oil prices affect you?  

The OPEC cuts and looming sanctions come amid strong demand.

In China, the world’s biggest oil importer, refinery runs rose nearly 12 percent in April compared with the same month a year ago, to around 12.06 million barrels per day, marking the second-highest level on record on a daily basis, data showed on Tuesday.

The tightening market has all but eliminated a global supply overhang which depressed crude prices between late 2014 and early 2017.

OPEC figures published on Monday showed that oil inventories in OECD industrialized nations in March fell to 9 million barrels above the five-year average, down from 340 million barrels above the average in January 2017.

Oil cautious on rise in US drilling, Iran sanctions opposition

CNBC

  • Oil prices edged lower on Monday.
  • A relentless rise in U.S. drilling activity points to increased output.

An oil pumpjack operates near Williston, North Dakota.

Andrew Cullen | Reuters
An oil pumpjack operates near Williston, North Dakota.

Oil prices edged lower on Monday as a relentless rise in U.S. drilling activity points to increased output, while resistance emerged in Europe and Asia to U.S. sanctions against major crude exporter Iran.

Still, crude prices were near more than three-year-highs reached last week as markets expect Iran’s oil exports to fall significantly once U.S. sanctions bite later this year.

Brent crude futures, the international benchmark for oil prices, were at $77.07 per barrel at 0010 GMT, down 5 cents from their last close.

U.S. West Texas Intermediate (WTI) crude futures were at $70.66 a barrel, down 4 cents from their last settlement.

Brent and WTI last week reached their highest since November 2014 at $78 and $71.89 per barrel respectively.

US sanctions on Iran could disrupt oil prices, ENI CEO says

US sanctions on Iran could disrupt oil prices, Eni CEO says  

“Around a million barrels of oil a day is likely to disappear from global oil markets if the U.S. sanctions on Iran bite,” said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

“But it is still far from certain that they will bite in the way intended…Germany has said it will protect its companies from U.S. sanctions, Iran has said French oil giant Total has yet to pull out of its fields and all the while it seems the Chinese are ready to fill the void created by the U.S.,” he said.

Markets were also held in check by a rise in U.S. drilling for new oil production.

U.S. drillers added 10 oil rigs in the week to May 11, bringing the total count to 844, the highest level since March 2015, energy services firm Baker Hughes said on Friday.

Oil prices hit highest in years as markets adjust to looming sanctions on Iran

CNBC

  • Oil prices clocked up more multi-year highs on Thursday.
  • Traders adjusted to the prospects of renewed U.S. sanctions against Iran amid an already tightening market.
  • In China, which is Iran’s single biggest buyer of oil, Shanghai crude futures posted their biggest intra-day rally since their launch in March.

A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.

Nick Oxford | Reuters
A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.

Oil prices clocked up more multi-year highs on Thursday as traders adjusted to the prospects of renewed U.S. sanctions against major crude exporter Iran amid an already tightening market.

The United States plans to impose new sanctions against Iran, which produces around 4 percent of global oil supplies, after abandoning an agreement reached in late 2015 which limited Tehran’s nuclear ambitions in exchange for removing U.S.-Europe sanctions.

Oil prices rose sharply in response to the announced measures.

Brent crude futures, the international benchmark for oil prices, hit their strongest since November 2014 at $77.76 per barrel on Thursday.

U.S. West Texas Intermediate (WTI) crude futures also marked a November-2014 high, at $71.75 a barrel, and they still stood at $71.67 a barrel at 0219 GMT, up over half a dollar, or 0.7 percent, from their last settlement.

In China, which is Iran’s single biggest buyer of oil, Shanghai crude futures posted their biggest intra-day rally since their launch in March, rising more than 4 percent to a dollar-denominated record of around $73.40 per barrel.

Goldman Sachs said the planned unilateral U.S. sanctions against Iran would likely have a “high level of efficiency”.

Oil's historical performance from May-August

Oil’s historical performance from May-August  

As a result of sanctions and because of risks to supplies elsewhere,especially in Venezuela, the U.S. bank said “this leaves risk our summer $82.50 per barrel Brent price forecast (is) squarely skewed to the upside”.

Analysts had little hope that opposition to the U.S. action would preventsanctions from going ahead.

“Europe and China will not fight against the U.S. sanctions. They will grumble and accept it. There is no one who will realistically choose Iran over the U.S.,” said energy consultancy FGE.

“We believe the previous 1 million bpd limit for exports (imposed during previous sanctions) will be reimposed. As before, it may take several rounds of reductions to reach target levels,” FGE’s founder and chairman Fereidun Fesharaki wrote in a note. He added that condensate, a super-light form of crude oil that was excluded in the last round of sanctions, may well be included.

Despite this, Fesharaki said the near-term impact on the oil market would be limited due to a 180-day wind down period as planned sanctions are implemented.

“But the impact will escalate as we approach November (i.e. the end of 180-day wind down period) … Oil prices will certainly move up, and $90-100 per barrel prices may again be on the cards.”

Sanctions come amid an oil market that has already been tightening due to strong demand, especially in Asia, and as top exporter Saudi Arabia and top producer Russia have led efforts since 2017 to withhold oil supplies to prop up prices.

U.S. crude inventories fell by 2.2 million barrels in the week to May 4, to 433.76 million barrels, according to the Energy Information Administration (EIA), slightly above the 420 million barrels five-year average level.

One factor that could prevent markets from tightening further is soaring U.S. oil output.

Weekly U.S. crude oil production hit another record last week, climbing to 10.7 million barrels per day (bpd).

That’s up 27 percent since mid-2016 and means U.S. output is creeping ever closer to that of top producer Russia, which pumps around 11 million bpd.

Oil prices inch up on Iran sanction worries

CNBC

  • Oil prices edged up, extending the previous session’s modest gains.
  • Iran’s foreign minister said on Thursday U.S. demands to change its 2015 nuclear agreement with world powers were unacceptable.
  • Iran resumed its role as a major oil exporter in January 2016 when sanctions against Tehran were lifted.

Oil jack pumps in the Kern River oil field in Bakersfield, California.

Jonathan Alcorn | Reuters
Oil jack pumps in the Kern River oil field in Bakersfield, California.

Oil prices edged up on Friday, extending the previous session’s modest gains as looming geopolitical risks from possible new U.S. sanctions against Iran supported the market.

U.S. West Texas Intermediate (WTI) crude futures added 3 cents to $68.46 per barrel by 0040 GMT.

Brent crude oil futures were at $73.67 per barrel, up 5 cents, or 0.1 percent, from their last close.

Iran’s foreign minister said on Thursday U.S. demands to change its 2015 nuclear agreement with world powers were unacceptable, as a deadline set by President Donald Trump for Europeans to “fix” the deal loomed.

“Current prices reflect a premium for Iran uncertainties. Investors are worried about supplies after Iran took a tough stance in its response to the United States,” Wang Xiao, Head of Crude Research with Guotai Junan Futures said, adding that prices may fall if expectations of new sanctions ease.

European powers still want to hand Trump a plan to save the Iran nuclear deal next week, but they have also started work on protecting EU-Iranian business ties if the U.S. president makes good on a threat to withdraw, six sources told Reuters.

Markets will remain skittish as the May 12 deadline to rectify the deal approaches, ANZ Research said in note.

Iran resumed its role as a major oil exporter in January 2016 when international sanctions against Tehran were lifted in return for curbs on Iran’s nuclear program.

Aside from security concerns, growing U.S. crude supplies are capping price gains.

West Texas Intermediate crude for delivery in Midland slid for a fourth day on Thursday to hit their lowest in more than three-and-a-half years. WTI at Midland WTC-WTM traded as much as $14 a barrel below benchmark futures.

Surging production in the Permian basin has continued to outpace pipeline capacity, while local refining issues have exacerbated oversupply in the region, dealers told Reuters.

Multi-year low spot market prices followed U.S. government data that showed a 6.2-million-barrel jump in crude inventories last week.

The United States now produces more crude oil than top exporter Saudi Arabia.