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Oil entered a bear market, fearing an economic slowdown. The fundamentals seem much more restrictive than fainting suggests, but the supply and demand situation also begins to look more negative.
The EIA report was exceptionally weak, showing a strong accumulation of crude oil (+6.8 million barrels), gasoline (+3.2 million barrels) and distillates (+4, 6 million barrels). The combined versions of several products have surprised the market. Sometimes these numbers will offset each other. For example, if refiners work very hard, they tend to build up stocks of gasoline, but they also consume crude oil. Crude inventories are declining even as gasoline inventories rise. This time, none of this. The widespread increases led to a drop in oil prices.
"Oil has a moment in Lehman Brothers," described Standard Chartered. The investment bank publishes its own "bear index," ranging from -100 to +100, which measures the direction that the market seems to take in a given week.
"Our US bullish index for oil data is -96.7, barely better than the extreme reading of -100 two weeks ago," the bank said. "The four-week average of the index is -79.4, which is well below the five-year range." There has not been a period as negative as four weeks since 2008, the bank said. In other words, the fundamentals of the oil market are going in a very bearish direction, and the last time that it seemed as bad was during the financial crisis. Related: This giant oil field has hit an impressive production record
The downside is that the US economy is not degenerating as it was after the collapse of Lehman Brothers. Thus, it is possible that oil prices "have exceeded the decline," noted Standard Chartered. "We think oil prices are now around 10 USD a barrel (bb) too low on a fundamental basis, unless a specific data point is considered a leading indicator rather than a temporary shock" said a Standard Chartered analyst in a separate report on Tuesday.
Demand, however, is starting to weaken. Standard Chartered notes that weakness is mainly limited to distillates (ie, lower activity in the manufacturing and agriculture sectors), with May's consumption falling by 9% per year. compared to the previous year. Although demand for gasoline has held up, it is still down 1.7% from last year.
A Wall Street Journal survey of 10 investment banks reveals an average Brent forecast of $ 70 a barrel for the year. The Brent is now in the low-60 $, so the main analysts largely escape the current trend and believe that the crude will rebound. They are considering the possibility of an economic downturn and are focusing instead on tightening supply conditions due to declines in Venezuela, Iran, potentially Libya and temporary service interruptions in Russia. "I'm always happy with our forecasts," said Warren Patterson, senior commodities strategist at ING, WSJ. "The sales we have seen have been purely motivated by macroeconomic and trade concerns, and if we look at the bottom line, we find that the supply of oil continues to tighten."
But it's not as if economic concerns have no effect on fundamentals. Clearly, an economic downturn would underpin demand, leading to a supply / demand imbalance. US tariffs pending on Mexico, if they progressed, would almost certainly worsen the gloom. Bank of America, Merrill Lynch, admitted. "Fears of a growing trade war, especially after Thursday night's news about the new US tariffs imposed on Mexico, have broken confidence. Manufacturing PMIs could deteriorate further in the coming months, derailing our average oil price forecast of 70 USD / bbl for 2019, "said the bank. Related: Breakthrough battery solves the major problem of electric car
The supply situation, even if it is currently tense, could also tip from a bullish perspective to a bearish outlook. In the United States, shale is expected to continue to grow despite low oil prices and financial strains in the sector. "The well-known demands of Wall Street, namely the reduction of spending by narrow and light oil producers, have fueled hopes of a slowdown in supply growth," said the tracking company. Kayrros data. These concerns are "exaggerated" and "fiscal discipline is not necessarily detrimental to the growth of production," said Kayrros. The company noted that even though the number of rigs is dropping, the data related to the completion of the works – which make it possible to more reliably track the growth of production – "were straightened with revenge in the first quarter of 2019 "after a weak fourth quarter.
Rystad Energy also expects strong growth in production, despite poor financial results. The Norwegian consulting firm has revised upwards its production forecast in the United States to close the year at 13.4 million barrels per day. "Our US supply forecasts have been revised up again. Oil production in the United States is already higher than many in the market think, "said Bjørnar Tonhaugen, head of oil market research at Rystad Energy.
If oil production in the United States continues to grow even as oil prices fall, the rebound of Brent and WTI will be all the more difficult to rebound.
By Nick Cunningham from Oilprice.com
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