Oil prices rose on Monday as U.S. drilling for new production stalled and as the market eyed tighter conditions once Washington’s sanctions against Iran’s crude exports kick in from November.
U.S. West Texas Intermediate (WTI) crude futures were at $68.19 per barrel at 0344 GMT, up 44 cents, or 0.65 percent, from their last settlement.
Brent crude futures climbed 30 cents, or 0.4 per cent, to US$77.13 a barrel.
US energy companies cut two oil rigs last week, bringing the total count to 860, energy services firm Baker Hughes said on Friday.
“[A]lthough the timing of the price slide comes as a surprise – Brent dipped well below $76 for a time [on Thursday] – the slide itself does not, as expectations recently have doubtless been too optimistic,” Commerzbank wrote in a note. In fact, to some, the timing was not all that surprising – WTI faced technical resistance at around $70-$71, and having failed to break above that threshold, was forced back down.
But beyond the technical analysis, oil prices also face some questions on the fundamentals. The emerging market turmoil (some say crisis, or contagion) has not gone away. Currency problems continue to dog a long list of emerging market economies, pushing a few into, or to the brink of, recession.
Because much of global oil demand growth is concentrated in rapidly-developing economies, currency weakness could have an outsized impact on crude oil demand.
“The worries about demand and a possible spillover from emerging markets are weighing on prices,” Hans van Cleef, senior energy economist at ABN Amro Bank NV, told Bloomberg. “We have tested breaking higher, but that failed, so now we have a temporary setback. I still expect the market to turn higher at some point, probably driven by Iran.”
Meanwhile, the Trump administration is rumored to be on the verge of dramatically ramping up the trade war with China, potentially moving forward on some $200 billion in tariffs. That would surely spark a response from China, and the back-and-forth retaliatory trade attacks could sap global growth. Also, China, specifically, is a major consumer of oil and one of the largest sources of demand growth, so a slowdown there could also go a long way to undercutting oil demand forecasts.
Also, this past week, the EIA reported weekly data that showed an uptick in gasoline inventories, a bearish sign that signals both an end to summer driving season and possibly hints at a slowdown in demand more generally. It’s one data point, however, so it doesn’t indicate a solid trend.
With two months to go on Iran sanctions, exports are falling fast. U.S. crude inventories are at their lowest point in years, and Saudi Arabia is going to be forced to burn through much of its spare capacity. U.S. shale, while signs of a production slowdown have yet to really materialize in the production data from the EIA, is still running into a rough patch. Just a few days ago, the CEOs of Schlumberger and Halliburton warned that drilling activity the Permian is cooling, which could translate into slower growth.
U.S. Energy Secretary Rick Perry will meet counterparts from Saudi Arabia and Russia on Monday and Thursday, respectively, as the Trump administration seeks the world’s biggest exporter and producer to keep output up.
One key question going forward is how demand develops amid the trade dispute between the United States and China, as well as general emerging market weakness.