Bart Melek, head of commodity strategy at TD Securities, suggests that fears that weak demand will negate OPEC+ cuts, speculation that millions of Iranians barrels are about to hit the market and outsized US inventories have depressed crude oil prices recently.
“This has occurred despite numerous escalations of tensions between the west and Iran in the Strait of Hormuz. WTI prices have fallen into $55/b territory last week, near levels which could well drive trend following CTAs to aggressively build additional short exposure.”
“Weak economic data in China and around the world has some observers believing that demand may drop by as much as 400,000 b/d next year, which could well drive the market into a surplus again and force prices lower. More immediately, as many as ten very-large crude carriers and two smaller tankers owned by the state-run National Iranian Oil Company are believed to be sailing toward or idling in Chinese ports. These vessels can carry some 20 million bbls combined, and have not been cleared by Chinese costumes.”
“Once this crude lands, it is likely that future Chinese imports would drop for a while, applying significant downward pressure on prices. This to some extent explains the recent price drop to support levels. The reason that crude is maintaining the current price is the rising tensions in the Middle East, particularly the Strait of Hormuz which is the most important global choke point which could cause a massive shortage.”
“The risk premium has gone up after Iran seized two UK-linked tankers in the area. The good news is that UK and Iran are de-escalating, but it could also mean that the pure fundamentals may take over, sending prices below $55/b and trigger CTA selling.”
“We judge that there is little appetite for a shooting war at this stage, but we also believe that tensions and the risk premium will remain, preventing a rout. We also see demand to remain firmer than many expect, and continue to see modest upside as the summer unfolds and US inventories fall.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.