The oil market turns to the autumn season

West Texas Intermediate fell 2.9%, the largest weekly decline since July, to $ 67.75 per barrel. That's after the benchmark US crude index peaked in August with one of its strongest rallies of the year, up more than 7% from mid-month. Brent, the world crude barometer, finished last week down 1% to 76.83 dollars, having almost reached its highest level in nearly four years.

The rapid rise and fall of oil prices is a sign that investors are evaluating conflicting signals in the market. On the one hand, the strength of developed economies in developed markets has kept demand for crude, while US sanctions against Iran have resulted in a decline in the country's oil exports, draining global supplies. At the same time, emerging markets have recently shifted into a bearish market, prompting investors to monitor closely whether larger declines would affect other assets.

Emerging markets are the main source of growth in oil demand, said Ole Hansen, Head of Commodity Strategy at Saxo Bank. It expects crude prices to be in a limited range, but short spikes may push up US gasoline prices, which could lead to lower oil prices. oil consumption. Crude demand growth would be affected by a "perfect storm of rising oil prices and weak currencies," he said.

In addition to pressures, the oil market is entering a season where demand is generally weakening. Autumn is considered a so-called "calm period" for oil, with prices often decreasing at the end of the summer season and refineries closing down for maintenance.

US oil prices have fallen between $ 64 and $ 74 since April, while Brent was between $ 71 and $ 79.

The data shows that demand for oil and fuel remains strong at the national level. Gasoline prices in the United States, at an average of $ 2.86 a gallon, are about 20 cents higher than they were last year.

But US motor gasoline supplied to the market – a figure used by economists as an indicator of demand – averaged 9.4 million barrels a day this year, up 1.3% from last year, according to the Energy Information Administration. .

"Demand is quite strong despite the change of season and emerging market concerns," said John Kilduff, Managing Partner of Again Capital, a New York-based alternative investment management firm specializing in commodities. It predicts that WTI will reach $ 85 by the end of the year, the highest price since the end of 2014.

But if oil prices are a few dollars higher than their recent level, analysts fear they will have a negative effect on the economy. Prices are about 40% higher than this time last year, and US consumer portfolios are already used to pay for gasoline at the pump, which has reached its highest level in the world. four years.

The decline in crude oil shipments from Iran, coupled with the potential for further declines in Venezuela's crisis-ridden output, could also lead to global shortfalls, pushing up prices. In May, President Trump withdrew the United States from a 2015 international agreement to curb Iran's nuclear program, paving the way for the re-imposition of economic sanctions on the country's oil sector.

"I believe the lost Iranian barrels will hit the market and consumers hard," Kilduff said.

The sharp rise in oil prices could also undermine inflationary pressures, which in some respects are already above the long-term expectations of the US central bank. This would give more reasons for the Federal Reserve to continue raising interest rates, which could hold back both economic growth and financial markets.

"What is happening in the energy markets is having a critical impact on monetary policy," Dallas Fed Chairman Robert Kaplan said Friday at a conference on energy efficiency. energy. "Obviously we've had price drift already, but if you have a peak, it obviously has a big impact on the American consumer."

All of this happens when US voters go to the polls in November for the mid-term congressional elections.

Certainly, most analysts do not expect oil to reach $ 85. Many analysts are confident that trade tensions between the US and China will be limited to prices, as the conflict could weigh on global economies and oil demand.

Analysts also say that an increase in oil production of OPEC members such as Saudi Arabia, as well as non-member countries like Russia, could offset the decline in Iranian output . Market participants will follow a meeting between OPEC producers and non-OPEC producers later this month in Algeria.

According to Gene McGillian, vice president of research at Tradition Energy, the number of Iranian barrels withdrawn from the market is the most important factor in the rise in oil prices.

While US allies in Europe and elsewhere have moved to end their oil purchases in the country, other countries like China have not been so clear about their plans.

"The question is how much oil the Chinese will buy in Iran," said McGillian. "Last time [during previous Iran oil sanctions] they bought a significant amount. "

Write to Dan Molinski at [email protected]