Oil set for worst week in 6 months as crude stockpiles surge

Ann Santiago
May 25, 2019

"Bearish sentiment is increasing in the market, largely because of the US-China trade conflict, which is getting worse", said Takayuki Nogami, the chief economist at Japan Oil, Gas and Metals National Corp.in Tokyo.

Futures in NY rose as much as 0.9% Friday after plunging 5.7% the day before.

Brent crude futures, the worldwide benchmark, hit a session low of $67.53 per barrel, trading down $3.15, or 4.5%, at $67.84 by 11:19 a.m. EDT (1519 GMT).

Brent crude fell 1.6% and WTI lost 2.5% on Wednesday, as the U.S.' Energy Information Administration (EIA) data revealed that commercial crude oil inventories in the country increased by 4.7 million barrels against the market expectation of a decline of 600,000 million barrels.

U.S. West Texas Intermediate (WTI) crude futures were down by US$3.04 cents at US$58.39 per barrel, after falling 2.5 per cent the previous day.

"Crude may have limited upside next week" as economic indicators in various countries are likely to provide more evidence of the trade war's impact, he said.

The prospect of a long-term tariff fight between China and the US also pressured prices. However, the addition of the tensions between Iran and the USA actually make the market "fragile".

Oil stocks have been teetering since Monday when President Donald Trump moved to block Chinese technology giant Huawei from the USA market as an extension of the tariffs he had been piling on China. But one of America's largest and fastest-growing exports has so far stayed out of Beijing's crosshairs: crude oil. In the event of tariffs, crude oil bound for China could simply be sent to other markets - and Chinese importers could meanwhile replace the USA crude with other sources.

USA sanctions on the oil industries of Iran and Venezuela, both OPEC members, have curbed their crude exports, reducing supplies further than the OPEC+ deal aimed to.

To avoid price declines, OPEC and its allies, including Russian Federation, agreed on December 7 to lower their total oil production by 1.2 million barrels per day for the first six months of 2019. "We're going to see a drift lower until there's a resolution of what's happening with China", said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia.

"We still expect the oil market to be in deficit both this year and next, but our oil price forecast is revised down slightly to US$71 per barrel for 2019 (from US$72 previously) and US$68 per barrel in 2020 (from US$70)".

However, while China is one of the largest destinations for US crude, the vast majority of China's oil imports come from elsewhere.

Brent's price structure remains in backwardation, in which prices for prompt delivery are higher than those for later dispatch, suggesting a tight balance between supply and demand. "This dynamic is now changing, and the price of oil has adjusted accordingly".

Outside the United States, Saudi Arabia on Wednesday said it was committed to a balanced and sustainable oil market.

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