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Oil market faces tidal wave of supply

L’internationale

Oil market faces tidal wave of supply

The oil market who had two-year bull run is running into one of its biggest tests in months, facing a tidal wave of supply and growing worries about economic weakness sapping demand worldwide.

After topping out at more than $75 and $85 a barrel just a month ago, both U.S. crude and Brent benchmark futures have grappled with near-relentless selling. For a time, prices had some support on hopes that renewed U.S. sanctions on Iran would force barrels off the oil market.

That changed in the last week. The world’s three largest producers on the oil market – Russia, Saudi Arabia and the United States – all indicated they were pumping at record or near-record levels, while the United States said it would allow waivers that could allow buyers to keep importing Iranian oil, lessening the threat of a supply crunch.

Those factors, along with a
spate of recent weak economic reports out of China and other emerging markets,
have shifted the conversation back toward worries about oversupply, and pushed
U.S. futures to lows not seen since April, interrupting an upward move that had
consistently found support during the rally’s modest pullbacks.

The structure of the U.S. crude futures
curve had for several months indicated expectations for tighter supply, but
future-dated contracts now suggest investors think markets could be awash in
oil over the coming months.

“The magnitude of recent
selling is strongly suggesting that global oil demand is weaker than expected
as a result of tariff issues, especially between the U.S. and China,” said Jim
Ritterbusch, president of Ritterbusch & Associates.

There has been an exodus among speculators as well. In the last two weeks, net bullish bets on oil have declined to the lowest level in over a year. Selling notably accelerated on Thursday after U.S. West Texas Intermediate crude futures fell below $65 a barrel, a level that had stood firm in previous selloffs during the summer and fall.

The oil market ran higher in
anticipation of this week’s formal re-imposition of sanctions against Iran by
the United States, and on concerns that supply from producers like Saudi Arabia
would not be able to make up the difference.

However, the U.S. government said on Friday it will temporarily allow several
countries including South Korea and Turkey to keep importing Iranian oil when
U.S. sanctions come back into force on Monday, sparing them for now from the
threat of U.S. economic penalties.

Still, some analysts believe
the current selloff has come too far, too quickly. Major OPEC producers won’t
be able to add more supply should it become necessary, particularly with
production in Iran, Venezuela and Libya still at risk.

“A loss of 1 million bpd from
Iran, further declines in Venezuela, coupled together with geopolitical
disruption in Libya and Nigeria could easily wipe out what little spare
capacity we have left,” Bernstein analysts said this week.

Output from the Organization
of the Petroleum Exporting Countries, led by Saudi Arabia, rose to levels not
seen in two years. U.S. production hit a record 11.3 million barrels a day in
August, and Russia’s output rose to 11.4 million bpd, a post-Soviet era peak.

For
U.S. crude, the key area to watch is between $64.45 and $64.80, where prices
had found support in the past, said Fawad Razaqzada, analyst at futures
brokerage Forex.com. If oil dips below this point, “the path of least
resistance would be to the downside,” he said.

For Brent, Razaqzada is
watching the range between $69.50 and $69.60 a barrel, and if it were to slip
below that, we could see a much larger correction, he said.

The oil market’s two-year bull run is running into one of its
biggest tests in months, facing a tidal wave of supply and growing worries
about economic weakness sapping demand worldwide.After topping
out at more than $75 and $85 a barrel just a month ago, both U.S. crude and
Brent benchmark futures have grappled with near-relentless selling. For a time,
prices had some support on hopes that renewed U.S. sanctions on Iran would
force barrels off the market.

That changed in the last
week. The world’s three largest producers – Russia, Saudi Arabia and the United
States – all indicated they were pumping at record or near-record levels, while
the United States said it would allow waivers that could allow buyers to keep
importing Iranian oil, lessening the threat of a supply crunch.

Those factors, along with a
spate of recent weak economic reports out of China and other emerging markets,
have shifted the conversation back toward worries about oversupply, and pushed
U.S. futures to lows not seen since April, interrupting an upward move that had
consistently found support during the rally’s modest pullbacks.

The structure of the U.S. crude futures
curve had for several months indicated expectations for tighter supply, but
future-dated contracts now suggest investors think markets could be awash in
oil over the coming months.

“The magnitude of recent
selling is strongly suggesting that global oil demand is weaker than expected
as a result of tariff issues, especially between the U.S. and China,” said Jim
Ritterbusch, president of Ritterbusch & Associates.

There has been an exodus
among speculators as well. In the last two weeks, net bullish bets on oil have
declined to the lowest level in over a year. Selling notably accelerated on
Thursday after U.S. West Texas Intermediate crude futures fell below $65 a
barrel, a level that had stood firm in previous selloffs during the summer and
fall.

The oil market ran higher in
anticipation of this week’s formal re-imposition of sanctions against Iran by
the United States, and on concerns that supply from producers like Saudi Arabia
would not be able to make up the difference.

However, the U.S. government said on Friday it will temporarily allow several
countries including South Korea and Turkey to keep importing Iranian oil when
U.S. sanctions come back into force on Monday, sparing them for now from the
threat of U.S. economic penalties.

Still, some analysts believe
the current selloff has come too far, too quickly. Major OPEC producers won’t
be able to add more supply should it become necessary, particularly with
production in Iran, Venezuela and Libya still at risk.

“A loss of 1 million bpd from
Iran, further declines in Venezuela, coupled together with geopolitical
disruption in Libya and Nigeria could easily wipe out what little spare
capacity we have left,” Bernstein analysts said this week.

Output from the Organization
of the Petroleum Exporting Countries, led by Saudi Arabia, rose to levels not
seen in two years. U.S. production hit a record 11.3 million barrels a day in
August, and Russia’s output rose to 11.4 million bpd, a post-Soviet era peak.

For
U.S. crude, the key area to watch is between $64.45 and $64.80, where prices
had found support in the past, said Fawad Razaqzada, analyst at futures
brokerage Forex.com. If oil dips below this point, “the path of least
resistance would be to the downside,” he said.

For Brent, Razaqzada is
watching the range between $69.50 and $69.60 a barrel, and if it were to slip
below that, we could see a much larger correction, he said.

Source : Reuters

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