By Navneet Damani
Crude prices ended the week gone by on a positive note, but that was not enough to offset the drop of more than 4 per cent.
In fact, Brent oil prices have cooled off to a two-month low following Saudi Arabia's pledge to ramp up output in the face of looming US sanction against Iran.
Last week marked a fourth straight weekly climb in crude inventory that has seen domestic supplies swell by a total of 22 million barrels.
"We saw some recovery on Friday after markets showed signs of surging demand in China. Traders buying on the dip following the sell-off also provided some upward jolt to the market. The market is getting cautious ahead of Iran sanctions and we have seen that major players are increasing their crude supply, including the US and the UAE. Meanwhile, countries like China are increasing their stock import ahead of any potential disruption due to the looming sanction.
The positive catalyst for crude prices may come from a likely tighter supply once Washingtons sanctions against Irans crude oil exports kick in this November. Markets were unmoved after data from Baker Hughes showed that the number of US drilling rigs rose by four to a total of 873, the highest since March 2015.
Meanwhile, the EIA reported in its short term outlook that US crude oil output in 2018 is expected to rise by 1.39 million bpd to 10.74 million bpd.
Oil prices slumped most after US crude oil stockpile rose by 6.5 million barrels for the fourth straight week, led by a notable increase in inventories at the Cushing hub, Oklahoma. US gasoline and distillate stock fell by 2 million barrels and 800,000 barrels, respectively. Meanwhile, OPEC and non-OPEC members reported that oil producers' compliance with a supply-reduction agreement fell to 111 per cent in September, from 129 per cent in August, a sign that oil producers have started to produce more to compensate for Iran sanctions.
Markets are still not sure about how much oil will be removed from the market once the sanctions start. But India, Japan and South Korea are already scaling back on purchases of Iran crude oil, which suggests that the number will be bigger than previously thought.
In a related development, Iran oil minister has reversed his decision to transfer ownership of nine state-owned oil companies from ministry to the newly formed NOC which would enable the incoming government of Prime Minister-designate Adel Abdul Mahdi to make its own decisions in the oil sector. He even said in an interview that Iraq hopes to produce 7 million bpd through the NOC and export 4 million bpd in 2019.
There was news that Iran shipped over 20 million barrels of oil to Chinas north-eastern port of Dalian against the 1-3 million barrels it typically receives each month.
Oil traders seem to remain cautious on simmering geopolitical tensions between OPEC kingpin Saudi Arabia and US over the suspected death of Jamal Khashoggi, a prominent Saudi journalist, who disappeared after entering the Saudi consulate in Istanbul in Turkey on October 2. US President Donald Trump has acknowledged for the first time that Khashoggi is likely dead and warned of very severe consequences if it was determined that Saudi rulers were behind it, without specifying what the action might entail.
Investors suspect the latest development could undermine the leadership of Crown Prince Mohammed bin Salman and has the risk of eventually destabilising the oil-rich kingdom.
Investor focus shifted to US-China relations and the ongoing Sino-US trade war. Data showed that refinery throughput in China rose to a record high of 12.49 million bpd in September as some independent plants restarted operations after prolonged shutdowns over summer to shore up inventories.
However, the report in question also showed that refinery consumption may rise through the fourth quarter as several state-owned Chinese refiners return to service after maintenance. On the other hand, China also reported its weakest economic growth since 2009 in the third quarter, with GDP expanding by only 6.5 per cent, coming in below estimates.
In coming weeks, the market will keep its focus on US sanctions on Iran, which will take effect on November 4. Meanwhile, the market will focus on the news of any meeting between officials from China and the United States aiming at seeking solution to the on-going trade tensions.
Henceforth, the direction of WTI will likely be determined by trader reaction to $68.54. A sustained move over $68.54 will signal that buyers will support the prices and help the graph move higher. Even it overtakes $70.10, it will mean buying is getting stronger and we could see a rebound rally into at least $72.63 next week.
(The writer is AVP, commodity research, MOFSL)