Volatility returns to the oil market

The commodity has certainly picked up momentum in recent months, but appears now to have the mid summer blues.

oil workers on rig
Brent crude was above US$47 with WTI holding above US$45

Talk of a balanced oil market shifted back to news of oversupply this week as leading banks resumed negative warnings.

The volatility has returned to the market and with it, the threat of a decline in price. In early trading on Friday, Brent crude was still above US$47 with WTI holding above US$45 a barrel.

It would appear that the oversupply has not been taken out of the market despite a few glimmers of hope in recent weeks.

Investment bank BNP Paribas warned of a US$40 possibility given the perfect storm of continued low demand and high supply.

OPEC strikes a more positive note

OPEC’s monthly oil market report struck a more positive note this week, saying that the annual decline rate of production in non-OPEC countries will outpace new production growth.

As a result, “the contraction seen this year in non-OPEC supply is expected to continue in 2017 but at a slower pace.”

The wait and see game continues over the summer months, with no real strong focus for investors. The longer term play into next year offers hope as OPEC expects “market conditions will help remove overall excess oil stocks in 2017.”

The International Energy Agency said it observed an increase of 600,000 barrels a day of global oil supply in June, currently at 96 million barrels a day.

The agency warned that “the existence of very high oil stocks is a threat to the recent stability of oil prices.”

With no change in current forecasts, the agency noted the growth of supply coming from the Middle East producers, adding their ability to feed the market is “an eloquent reminder that even when US shale production does resume its growth, older producers will remain essential for oil markets.”

The recent resumption of uncertainty is causing major banks to revise their price predictions in the coming year.

Fear that global oil demand growth could slow

Bank of America Merrill Lynch says there’s a fear that global oil demand growth could slow down to 0.7 million barrels a day in 2017 and Brent Crude Oil prices would average around US$52 a barrel.

JBC Energy in Vienna warned “that a down cycle on oil’s own fundamentals is now starting,” as crude fundamentals look weaker than many realise.

The promise of a strong driving season in the US that would remove surplus gasoline stocks has not fully materialized.

Fuel inventories remain high, up 1.21 million barrels last week according to the US Energy Information Administration.

US driving season has peaked

The summer is not over yet, but “driving season” in the US has hit its peak, fearing declines in demand from here until September.

The volatility in the oil market will not go away. The commodity has certainly picked up momentum in recent months, but appears now to have the mid summer blues.

Until there’s a clearer indication of a decline in the over supply and an increase in demand, we cannot expect too much positive price movement. 

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