Surplus and rising appetite in the oil markets: lukewarm prospects

oil markets, Putin, Saud Arabia
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Is Saudi Arabia Leaving The U.S. Behind For Russia?

The drowsy oil market since 2013 will seemingly continue in the next six months as well.

The $5 crude range is the narrowest in 19 months while the volume was the lowest since December. The open interest – the number of outstanding futures contracts – was the lowest since January. According to some analysts the future prospects are bleak too: in the past months New York oil futures traded around the $60 a barrel and it will average about $59 and $63 in the third and fourth quarter respectively.

Despite the Iranian comeback to the crude markets and the undergoing U.S. shale production decline, the markets stay apparently unmoved. Although gasoline demand has risen faster than expected, curbing slightly the oil abundance from growing, the record level production from OPEC’s Saudi Arabia and the sudden increase in U.S. shale output have limited possible rally in prices from the biggest fall since 2008.

“The market has found its equilibrium point and I don’t see any reason for us to break out of the range,” commented Janne Muta, chief market analyst at HotForex on Wednesday. “It’s a tug of war between gasoline demand and crude supplies.”

The present markets conditions are bleak by all means. West Texas Intermediate crude plunged about 60 percent from $107.26 in June 2014 to $43.46 in March before the price started picking up about 40 percent. The U.S. benchmark grade lost 21 cents to $56.72 a barrel in electronic trading on the New York Mercantile Exchange at 11:49 a.m. Singapore time Friday.

Trading Volume: Silly Season or Worse

Volume averaged 800,000 contracts a day in the first four months of this year. It dipped to 636,128 last month, down 40 percent from February’s record high of 1.07 million, according to exchange data from the ETF database. Open interest fell to 1.612 million on June 22, the lowest since January.

Investors withdraw $1.02 billion from the ETF last quarter, the biggest outflow since the early months of the financial crisis, June 2009.

The facts, that the OPEC crude production is at record high level while the U.S. output (even though the drilling rigs number has plummeted recently) still on the rise eliminates any chance of price rally on the oil markets.

OPEC Output

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Oil Prices: Dawn or Dusk?

The Organization of the Petroleum Exporting Countries pumped 32.1 million barrels crude a day in June, that is above its 30 million quota for a 13th month. U.S. production was 9.6 million barrels a day last week, close to a weekly record, according to the Energy Information Administration.

“We are more likely to continue trading in a range until we see a material shift in U.S. production,” commented the market situation Harry Tchilinguirian, BNP Paribas SA’s head of commodity markets strategy.

The only bright news is that the U.S. gasoline demand increased to 9.54 million barrels a day in the four weeks ended June 26, the highest level since 2007, according to the EIA.

Oil prices could drop further if Greece exits from the euro zone or a lasting nuclear deal with Iran is signed, added Kristian Kerr senior strategist at dailyfx.com.

The Greeks again heading to the polls on July 5 to cast their vote for or against further austerity measures demanded by the international creditors. The referendum could end Alexis Tsipras, Greek prime minister political career or the Greek expulsion from the euro-area.

Oil Markets Upside, Down?

Iran has asked OPEC to allow it to produce 4 million barrels a day from the current 2.85 million in June.

Some analysts predicted oil price hike as the U.S. rig volume decreased. Rob Thummel, a managing director at Tortoise Capital Advisors LLC in Leawood, Kansas, which oversees $16.9 billion, said oil may move above $65 in the second half and into a $65-to-$80 range eventually as U.S. production slows.

Most of the investors and analysts agree, that the price moving factors are the potential Iranian deal, the Greek referendum and the future trajectory of the U.S. output. Until these factors are unclear oil, price stays unpredictable.