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Oil price rally short-lived as market no more on the edge

 

Cogencis, Friday, Jan 10

By Sayantan Sarkar and Roshni Devi

MUMBAI – The recent escalation of tensions in West Asia after an attack by the US last Friday killed a top Iranian general, should have been music to the ears of crude oil bulls. However, a week later, oil prices are actually a shade lower than the pre-attack levels, as both nations seemed to step back from further confrontation, which eased concerns about a disruption in supply.

Today, West Texas Intermediate crude is trading around $59 a barrel, down $6 from the high of Jan 8, when the crisis between the US and Iran peaked.  

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Analysts also attributed the retraction in prices to more maturity on the part of investors, as well as market fundamentals. 

"Investors were not too keen to price in a risk premium pre-emptively, before production, and shipping of oil from the region were affected," said Vandana Hari, founder, Vanda Insights, adding that the spurt in prices was seen as a one-off. 

Crude oil futures jumped 5% on Jan 3 after the US attack on Baghdad airport, which killed Iranian Major General Qassem Soleimani, the leader of the Quds Force, and raised fears of a full-fledged war between the US and Iran, disrupting crude oil supply. 

On Wednesday, prices again shot up after Iran retaliated by bombing two Iraqi bases where US troops were stationed, and claimed that 80 US military personnel were killed. However, the rally proved short-lived and prices fell after the US said the damage to the US military base was minimal and had not led to loss of its personnel.

WTI crude on the New York Mercantile Exchange slumped 5% overnight on Wednesday from an eight-month-high of $65.65 per barrel and Brent crude oil fell over 4% from an over four-month high of $71.75 per bbl.

Though geopolitical tensions continue, the upside in crude oil remains capped, experts said. 

"Markets are more mature now. Rhetoric, fear and expectations alone won't move prices much higher," said Gnanasekar Thiagarajan, founder director of Commtrendz Research and Fund Management.

WTI crude may test $67 a bbl on New York Mercantile Exchange, if tensions in the region escalate again, but it's unlikely to rise beyond that if fundamentals are not affected, Thiagarajan added.

With an output of around 4.7 mln bpd, Iraq is the second-largest producer in the Organization of the Petroleum Exporting Countries. The fact that there has not been any impact on Iraq's oil facilities has quelled fears of disruption in supply. OPEC General Secretary Mohammed Barkindo assured markets that production in the region was secure.

Trump's threats of further sanctions on Iran have largely left markets unaffected as the country's exports and production of crude oil have almost halved since 2018. "Moreover, Iran is not capable of engaging the US in a full-fledged war, and therefore the market does not see any signs of oil supply being disrupted," said Sukrit Vijayakar, director at Trifecta Consultants.

Traders have now turned cautious about rallies in oil prices triggered by geopolitical events. In September, crude oil spiked 20% after Saudi Arabian oil facilities were attacked, only to give up all of its gains shortly thereafter. 

That, in part, could have been due to ample supply, despite OPEC opting for steeper cuts in production.

OPEC and its allies have agreed to deepen their production cuts by 500,000 bbl per day and will reduce output by 1.7 mln bpd in Jan-Mar. The decision had lifted WTI and Brent oil prices by more than 3% and 2%, respectively, in December alone. The cartel also said that supply disruptions are unlikely, and they are not considering a meeting amid tensions in West Asia.

"Production by OPEC and allies will be guided by what's happening around the world. They won't want to pre-emptively flood markets. They will also be cautious to not add to supply," Hari said. 

OPEC and its allies have reportedly pumped 29.5 mln bbl per day of oil in December, which is only marginally down from November.

The fact that US President Donald Trump had announced in December that the phase one trade deal with China would be signed in January also supported prices. 

"The trade deal doesn't add more demand as the market has already factored in the developments," said Thiagarajan.

"There isn't much scope for higher prices as producers have ample spare capacity. With global demand growth decelerating, there are enough inventories, and US can ramp up shale oil production if needed," Hari added. 

In December, the International Energy Agency estimated that global oil inventories would increase by 700,000 bpd in Jan-Mar.

Additionally, the US Energy Information Administration expects the US to turn into a net exporter of crude oil and petroleum products in 2020. It projected that the US, the world's largest producer, is expected to export an average 570,000 bpd of oil in 2020 compared to average net imports of 490,000 bpd in 2019.

Production in the US had touched a record high of 12.9 mln bpd in November. 

In its report for the week ended Jan 3, the US energy body said that US petroleum stockpiles soared by 9.1 mln bbl, while distillate inventories climbed by 5.3 mln bbl, which indicate that there is no dearth of supplies in the market. 

"Clearly, refineries are cranking out as much products as they can in anticipation of demand that hasn't kicked in," Investing.com's senior commodities' analyst Barani Krishnan said in a report, adding that lack of geopolitical tensions will drive the market further down now.

Under all these circumstances, crude oil might have to wait for a long-lasting rally in prices as the market seems mature enough to not react aggressively to geopolitical developments.  End

US$1 = 70.98 rupees

Edited by Maheswaran Parameswaran

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