As tensions between the United States and Iran continue to rise, the oil market keeps struggling to sustain a rally despite supply restrictions that generally would be considered bullish.
This is largely because US sanctions on Venezuela and Iran have removed more than 1.5 million barrels of daily supply from the market, and the Organisation of Petroleum Exporting Countries (OPEC) has extended a supply-cut deal into 2020.
Consequently, in recent days, sentiment in the oil market has shifted dramatically with hedge funds, producers and traders all taking a more bearish tack in response to what they see as weakness in worldwide demand.
However, Brent futures have struggled to sustain a move above $65 a barrel and slumped about seven percent last week, while US futures have rarely moved above $60 a barrel.
InsideOut Advisors’ Janelle Matharoo, has this to say, ‘’given all the bullish news we’ve had, the flat price has hardly changed commodities trading and risk management consultancy. Fifteen years ago, this kind of news would have shifted the price $20, $30 per barrel.’’
Hedge funds and investors have exited bullish bets on the realisation that demand may be weaker than anticipated while US production surges. Producers, meanwhile, have rushed to lock in future prices, betting that this may be their best chance to protect against a selloff, oil traders and brokers said.
Front-month, or current, futures contracts have not had a massive selloff – but looking at later-dated contracts, the underlying weakness is apparent.
The premium on front-month Brent crude futures compared with oil to be delivered in half a year has fallen from a six-year high in May at more than $4.00 a barrel to less than $1.50 last week. That is a signal that worries about tight supply have abated.
Even rising tensions in the Strait of Hormuz, where the US and others are moving to protect tankers against Iran, has produced only modest gains. On Friday, news that Iran had seized a British tanker supported prices – but futures rose less than one percent.
The steady rise in US oil output and demand worries from a protracted Sino-US trade war, however, have weighed on demand forecasts.
The International Energy Agency (IEA) recently cut its expectation for global demand through 2019 and 2020 and said it may cut it again if the global economy and especially China, show further weakness, while Saudi Arabian exports fell to a 1-1/2-year low in May.
Traders, according to Reuters, said there has been ‘’relentless’’ selling in bullish Brent call options as far as December 2021 and 2022, a reflection of growing expectations that demand for oil is weakening as supply grows.
‘’There’s a feeling on the margin that the current price is potentially unsustainable and the market structure supports that’’, the news agency quoted Matharoo.
Average 2020 Brent oil prices slipped to the weakest in a month at $60.28 a barrel last week. Separately, bullish speculator bets on US crude futures and options on the NYMEX <3067651MLNG> are near the lowest level since 2013.
The price weakness presents challenges for oil producers, and many have started to hedge to protect against a damaging future downturn in prices, and with the recent weakness in the market, some consultants are warning about waiting too long to protect against future market moves by buying options to sell or buy oil at a certain price in the future.
Thibaut Remoundos of the London-based hedging consultancy, CTC said, ‘’we’re telling producers it’s time to lock in. We’re less bullish than most of our clients… We believe there is greater downside risk than is priced in.’’