Crude feels the calm before the storm

Updated November 04, 2018


The overheated crude markets have finally cooled down — and just before the mid-term elections in the US.— Reuters/File
The overheated crude markets have finally cooled down — and just before the mid-term elections in the US.— Reuters/File

Crude markets are calming down, and interestingly, just before the mid-term elections in the US. Is that a mere coincidence?

After hitting one spike after another, sending chills all around, the overheated crude markets have finally cooled down — and just in time.

Oil prices tumbled more than three per cent on Thursday to its lowest level since August. Brent crude fell below $73 a barrel, extending a price slide to more than 15pc since it peaked above $86 a barrel beginning October.

In the course, Brent crude dipped below the 200-day moving average for the first time since 2017, seen as a bearish signal and usually an invitation for more selling. WTI too dropped below this same technical level in October.

A number of factors appear to have lined up, as markets enter a comparatively restrained phase.

The US output continues to hit new highs. The monthly supply numbers released by the US Energy Information Administration (EIA) showed an increase in US crude oil production to 11.35 million barrels per day (bpd) in August — almost 420,000bpd higher than the previous month and more than 2.1mbpd up on last year.

The EIA also reported a 3.22m barrels build-up to the US crude inventories. This was the sixth straight week showing US crude oil inventories climbing.

Output from the Organisation of Petroleum Exporting Countries (Opec) members and its non-Opec ally, Russia, is also heading north. Saudi Arabia increased its oil output by 0.15mbpd to 10.68mbpd last month and has been pointing out that it could increase its output to 11mbpd or even higher.

Significant increase in crude output by the United Arab Emirates and Libya also seems to be offsetting the impact of a possible cut in Iranian shipments due to US sanctions, set to start on Nov 4.

Russia, a non-Opec, has also opened its crude taps further. As per reports, Russia’s October production has hit another post-Soviet record of 11.41mbpd.

Recent reports that Iran’s oil exports ahead of the sanctions were higher than earlier estimated.

This has provided impetus to the expectation that oil markets will not be on a roller-coaster as the Iran embargo gets into effect, and the impact of the sanctions on crude markets would only be moderate.

In the meantime, reports began pouring in that the US, was granting waivers to ‘friends’ to continue importing crude from Iran. As per press reports, Washington has given waivers to eight countries. Several nations “may not be able to go all the way to zero” right away on (crude) purchases (from Iran), conceded the otherwise hawkish White House National Security Adviser John Bolton.

America wants to put maximum pressure on Iran, but doesn’t “want to hurt friends,” he added.

This also contributed to the growing speculation that American sanctions against Iran won’t succeed in reducing Iranian exports to zero.

S&P Global Platts tanker-tracking service, cFlow, reported that exports of Iranian crude and condensate (an ultra-light oil) averaged more than 1.7mbpd in October, just ahead of the month’s end. That was definitely 700,000 bpd lower than the six-month average from November 2017 through April 2018 — before Trump’s sanctions announcement — but not zero as the Trump administration targeted initially.

The equity rout and US-China trade tensions also appear clouding the global crude horizon.

Concern about the global economic health is growing. Markets are worried about the prospect of a global

slowdown. This is beginning to curb crude demand growth. China delivered disappointing PMI data, with its manufacturing sector in October expanding at its weakest pace in over two years. Many took it as an indication of things to come. “Oil investors are now betting on the potential of a global slowdown,” Bruce Xue, an analyst with Huatai Great Wall Capital Management was quoted as saying.

It was apparently in this perspective that President Donald Trump underlined in a memorandum, “There is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions.”

Keeping a lid on oil prices ahead of the mid-term elections has been a top priority for the Trump administration. And with gasoline futures falling last week by 2pc to $1.7165 per gallon, President Trump seemed to have achieved his objective — to a great extent. With mid-term elections just a few days away, this was definitely a good news for the Trump administration.

And it could not be just coincidental.

Published in Dawn, November 4th, 2018