Response to US Sanctions Likely to Guide Crude Oil Market

OILMONSTER.COM- WTI and brent oil traded firm, but gains were capped amid concerns for future demand. Since mid-August, crude oil has been driven higher by worries about a supply shortage and weakening US dollar. 

Last week, prices were driven lower by too much supply and worries over global demand. A stronger dollar and weaker US equity markets also weighed on prices. 

US energy companies cut two oil rigs last week, bringing the total count to 860. The US rig count has stagnated since May, after staging a recovery since 2016, which followed steep slump previous year amid plummeting crude prices. The early weakness suggests investors have shifted their focus away from supply concerns, which drove up prices last week, to demand concerns. One issue bothering bullish traders is the risk of declining Chinese demand for oil. 

Oil prices jumped midweek as traders took precautions ahead of potential supply disruptions due to a hurricane forecast for the upper US Gulf Coast. Hurricane Gordon led to precautionary closure of rigs around the Gulf of Mexico. 

With uncertainty around the probable impact on supply from the region, crude oil prices saw substantial uptick in the last few trading sessions, with Brent crossing the $79 per barrel mark. September is notoriously popular for hurricanes in the US and threat of the same continues. After this, winters, which sees a surge in demand, would kick in, thereby providing support to crude prices. 

The storm was expected to become a hurricane before it makes landfall as a Category 1 hurricane near the Mississippi-Alabama border. Prices moved lower later in session due to technically overbought conditions. The speculative buyers were way ahead of the actual event and that the direction of the storm is still unknown as well as what infrastructure, if any, will be impacted. Also putting pressure on crude oil was a report from Genscape that said Cushing, Oklahoma, crude inventories rose nearly.

Iran is now pushing European partners to provide written guarantees for upcoming demand as per the agreement. Iran's oil exports to the EU have declined by nearly half in the past 18 months. Iranian oil exports to the EU dropped to 387,000 bpd in Aug, from nearly 740,000 bpd in March, 2017. Amid all this, Iranian oil production has seen a sharp dip going below the 1 million bpd mark in August from the 2.3 million bpd a month before. 

Iranian production is arguably single most important catalyst for oil prices, but with fear of collapsing output so high, markets may be overestimating just how bullish sanctions on Iran will be. Iran is also likely to use any means at its disposal, as it did during the last sanctions, to ensure it is able to export its oil. The fact that these sanctions are largely unilateral means that Tehran is likely to have more luck this time with undermining US efforts. 

Courtesy: www.economictimes.com