U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished the week higher but it was the weekly road-travelled that was most interesting. Both futures contracts soared early in the week, only to be met by a wave of selling pressure that almost erased all of those gains. However at the end of the week, it was able to mount a strong recovery to sustain some of those earlier gains.
The reason for the upside bias continues to be the tightening in the market. The catalyst behind the tightening is worries about tighter supply conditions once Washington’s sanctions against Iran’s crude oil exports kick in beginning in November.
Traders still aren’t sure how much oil will be removed from the market once the sanctions start. But, the news that India, Japan and South Korea are already scaling back on purchases of Iran crude oil suggests the number will be bigger than previously thought.
Conditions are bad. How bad you ask? Bad enough for Russian energy minister Alexander Novak to call the situation “fragile”.
“This is huge uncertainty on the market – how the countries, which buy almost 2 million barrels per day of Iranian oil will act. The situation should be closely watched, the right decisions should be taken.”
Novak said geopolitical risk and supply disruptions shared the blame for the global oil markets “fragile” condition.
Novak also said, “It is related to the fact that not all countries have managed to restore their market and production.” Traders suggested he was referring to outages and falling production in Venezuela and Mexico.
However, he did add that “Russia has potential to raise production by 300,000 barrels per day (bpd) mid-term, in addition to the level of October 2016.”
One worry for the bulls is future demand. Gains have been limited recently by reports that emerging market weakness and the impact of tariffs on China’s economy could lead to lower demand and that this will offset the impact of the sanctions.
The timeline of the events are basically driving the price action, however. The sanctions start in November so that is a more immediate concern for traders. Any worries about demand will come later. Therefore, tightening at this time is the major worry underpinning prices. Additionally, this market is extremely vulnerable to any unexpected supply disruption and if one occurs, prices could spike sharply higher.
Additionally, on Friday, Secretary of State Michael Pompeo said he would hold a news conference on new sanctions on Iran. This will certainly increase the chances of less oil coming from Iran.
In other news, U.S. energy companies last week added oil rigs for a second week in a row with crude prices trading near their highest since the summer of 2015 as major oil producing countries extended a global deal to limit supply.
In breaking news over the week-end, The Wall Street Journal reported Saturday, citing individuals familiar with the matter that President Trump is planning to impose a fresh round of tariffs targeting about $200 billion in Chinese goods.
I don’t think the news of new tariffs will have much impact on the crude oil market since the idea has been floated for over a week. Tightening supply will continue to remain the main issue and this is bullish for prices.
This article was originally posted on FX Empire
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