Crude oil going nowhere, can API report help it?

Andrew Cummings
September 6, 2018

Near-term futures for Brent crude, the benchmark for more than half the world's oil, are trading higher than later contracts in a market structure known as backwardation that typically signals a supply squeeze. So far, the news is having a limited impact on Brent prices.

But prices could also be hit by lower demand from China due to a trade war with the U.S.

Oil prices rose on Monday, supported by concerns that falling Iranian output will tighten markets once USA sanctions bite from November, but gains were limited by higher supply from OPEC and the United States.

Refiners have rushed to take cargoes before USA sanctions come into effect in November.

Traders on Monday apparently also took note of Baker Hughes reporting an increase in USA oil rigs for the first time in three weeks, adding two for a total of 862 rigs. In fact, the USA has increased oil production by 30% since the middle of 2016 to its current rate of 11 million barrels of oil per day.

"Exports from OPEC's third-biggest producer are falling faster than expected and worse is to come ahead of a looming second wave of USA sanctions", said Stephen Brennock, analyst at London brokerage PVM Oil Associates.

On Friday, WTI crude oil settled at $69.80 a barrel while ICE Brent crude closed at $77.42.

What's noteworthy about OPEC's August performance is that while production from the cartel's de facto leader Saudi Arabia edged up 10.48 million bpd, this was still intentionally lower than the kingdom's 10.60 million bpd showing for June - suggesting that if the Saudis made a decision to put aside worries about flooding the market and pump full out, OPEC could arguably put to rest persistent criticism that it isn't able to make up for shortfalls from Iran or Venezuela.

Oil has averaged more than $70 a barrel this year after the Organization of Petroleum Exporting Countries and its allies curtailed output to eliminate a global glut. This increasing production would help allay fears of a tightening global market and reduce the bullishness in markets.

"The U.S. crude marker is leading the energy complex as a fast-approaching tropical storm triggers a spate of evacuations and production shut ins across the U.S. Gulf Coast".

The risk of declining Chinese demand for oil is worrying Middle East officials more than Iran's supply curbs as a result of USA sanctions. Officials say that Washington's aim is to bring other countries' imports of Iranian oil down to zero. Front-month prices have soared nearly 50 per cent over the past year, and were at $79.17 a barrel at 11:01 am in London on Tuesday.

The larger-than-expected draw in U.S. crude inventories for the week ended August 24 has been keeping prices supported, analysts said.

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