Oil had only the worst run since 2008
Oil has entered a bear market as a fear of an economic downturn. The baselines look much tighter than the swimming can indicate, but the demand picture also begins to look negative.
The EIA report was very weak, showing a strong build-up in crude oil (+6.8 million barrels), gasoline (+3.2 million barrels) and distillates (+4.6 million barrels). The combined building on several products surprised the market. Sometimes these numbers compensate for each other. For example, if refineries run very hard, they tend to build up petrol containers, but they use up crude in the process, so raw stocks dip even when gasoline stocks rise. This time none of it was. Increases across the board led to a fall in oil prices.
"Oil has a Lehman Brothers moment," is how Standard Chartered described it. The investment bank publishes its own "bull-bear index", ranging from -1[ads1]00 to +100, measuring the direction the market appears to be heading for a given week.
"Our US oil data bull bear register – 96.7, just a little better than the extreme -100 reading of two weeks ago, the bank said." The four-week average of the index is -79.4 and takes it far below the five-year room "There has not been such a small four-week run since 2008, the bank said. In other words, the oil market goes basically in a real bearish direction, and last time things looked like this was bad during the financial crisis. Related: This Giant Oil Field Just Hit An Impressive Production Post
The front page is that the US economy does not sprout out of control as it was after the collapse of Lehman Brothers, so it is possible that oil prices "have a disadvantage," says Standard Chartered. "We believe that oil prices are now around USD 10 per barrel (bbl) too low on a basis, unless a particular data point is assumed to be a leading indicator rather than a temporary blip," said Standard Chartered Analysts. n own report on Tuesday.
Nevertheless, demand begins to weaken. Standard Chartered notes that the weakness is mainly limited to distillates (ie weaker activity in industry and agriculture), with consumption in May falling 9 percent, from year to year. While petrol demand has risen, it remains at 1.7 per cent from the previous year.
A Wall Street Journal survey of 10 investment banks finds an average Brent forecast of $ 70 a barrel for the year. Brent is now in the low-$ 60s, so big analysts largely shrugging off current tailspin and believe that crude oil will rebound. They overlook the possibility of an economic downturn and instead focus on tightening supply conditions due to declines in Venezuela, Iran, potentially Libya and temporary outbreaks from Russia. "I'm still happy with our forecasts," Warren Patterson, senior trading director at ING, told WSJ. "The market itself we have seen has been driven by macroeconomic and trade concerns, and if we look at the basic picture, we see that the oil supply continues to tighten."
But it is not as if financial concerns have no effect on the basics. Clearly, an economic downturn would undermine demand, leading to a lack of supply and demand. The pending American tariffs on Mexico, if they were to move forward, would almost certainly deepen the gloom. Bank of America Merrill Lynch admitted so much. "Fear of a growing trade war, especially after recent Thursday night news of new US tariffs on Mexico, has destroyed confidence. Production PMIs may worsen further in the coming months, making our average oil price forecast of $ 70 / bbl in 2019," said the bank. . Related: Battery Breakthrough Solves Large Electric Car Problem
The supply, while currently tight, may also turn from a bullish perspective to a bearish one. The US slate is expected to continue to grow. Despite the low oil prices and economic stress in the sector, "Well-publicized Wall Street requires lightweight oil producers to clear their spending has driven expectations that supply growth will soon slow down," said Kayrros, data tracking firm. and "budget discipline does not necessarily come at the expense of production growth," said Kayrros, the company noted that while the rig number is down, the good completion data – which more reliably tracks production growth – "jumped back with a revenge in Q1 2019" after a soft fourth quarter.
Rystad Energy also sees strong production growth ahead, despite the poor economy. The Norwegian consulting firm revised the forecast for US production to end the year by 13.4 million barrels per day. "Our US supply forecasts have been revised again. US oil production is already higher than many in the market believe," says Bjørnar Tonhaugen, head of oil market research at Rystad Energy.
If US oil production continues to grow even as oil prices slide, it will give a boost for Brent and WTI is even more difficult.
By Nick Cunningham from Oilprice.com
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