12/07/2015

While the world awaited the outcome of the deliberations in Vienna on Iranian nuclear program, uncertainty ruled the crude markets making it swing - in patches.

As the ongoing nuclear talks between Iran and six world powers appeared dragging beyond the Thursday’s midnight deadline giving the US Congress an extra month to review the deal, oil markets recovered on Thursday from the lows it experienced earlier in the week.

In the meantime, the panic selling of equities on the Chinese stock markets earlier in the week generated concerns about the state of the economy of the world's largest crude importer. These included trading suspensions and cheap financing, resulting in a rebound, impacting the crude market sentiments too - rather positively - after the bloodbath witnessed at the beginning of the week.

The picture at the beginning of the week was even grimmer. Oil prices were falling amid concerns about Greece, the upheaval in the Chinese markets and the continued oversupply of crude oil. Chinese stocks took a plunge after the country's securities regulator warned. Investors were in the grip of "panic sentiment" and the market showed signs of freezing up as firms had their shares suspended.

Crude markets took the hit. "Investors have justifiable concerns about the outlook for both supply and demand going forward given current events," Reuters reported. "Turmoil in China and Greece may put recent robust demand growth at risk," Morgan Stanley analysts said in a report.

Resilience of the US shale output was also seen impacting the crude dynamics. Despite the clamor by some that low oil prices would impact the US shale output considerably, it has proved to be more immune to lower oil prices than many had anticipated. US inventory data showed an unexpected increase in US domestic crude supplies, sinking the US benchmark price of oil to a three-month low. US shale gas production in conjunction with oil coming from traditional sources contributing to a global glut were pushing the energy prices down.

However, the outlook began to change by Thursday, as some stability seemed returning to Chinese markets and the deal with Iran too appeared delayed.

Yet the medium to long term crude view continues to be hazy - at best. Markets are nervous. Since hitting the year-high of $69.63 barrels in May this year, oil markets have fallen significantly.

Oil prices are “massively oversupplied,” and may fall further, the Paris-based International Energy Agency said in its Monthly Oil Report, emphasizing the market was unable to absorb the huge volumes of oil now being produced. "The bottom of the market may still be ahead," it said in rather bold letters.

Adding to the gloom was its forecast that the global oil demand growth was to slow down to 1.2 million bpd in 2016 from an average 1.4 million bpd this year.

Others too are betting on an oversupply scenario. "We do think there's risk of oversupply for a long time," Bart Melek, head of commodities strategy at TD Securities was quoted as saying. "Technically on WTI, we've fallen through some technical support levels and, depending on what happens, we could test the low."

Looking at the long-term chart of US oil production going all the way back to the 1920s, Carley Garner, the co-founder of DeCarley Trading, pointed out that the US has doubled its monthly oil output since the lows of 2008 and is nearly back to its peak levels set back in the 1970s. Thus, unless some sort of unforeseen powerful even occurs, she believes that the oil market will be oversupplied for a long time.

Crude markets have been struggling this year with the ramped-up production from OPEC members as they pledged not to back off on their 30 million barrels-per-day production target. Yet OPEC was producing even beyond this. In June, the OPEC output touched 31.3 million barrels a day, Platts reported. The US, meanwhile, has also been producing at about 9.6 million barrels a day, and the Energy Information Administration now projects US average output this year to be 9.47 million barrels a day.

Syed Rashid Husain - Saudi Gazzette