U.S. West Texas Intermediate and international benchmark Brent crude oil futures are trading slightly lower early Thursday after posting a volatile two-sided move the previous session. Traders are saying that today’s early weakness is being fueled by reports that Russia and Saudi Arabia struck a private deal in September to raise crude output.
U.S. government data released on Wednesday showed a much more significant than forecast build in U.S. commercial crude inventories. Initially, this triggered a quick break, but this move was quickly gobbled up by aggressive hedge funds who increased their bullish bets for $100 crude oil. The buying was strong enough to trigger a breakout to the upside into four-year highs.
According to the U.S. Energy information Administration, U.S. crude oil stocks rose by nearly 8 million barrels last week to about 404 million barrels, the biggest increase since March 2017. Traders were looking for a build of 2.76 million barrels.
U.S. weekly Midwest refinery utilization rates dropped to 78.9 percent, their lowest since October 2015, according to the EIA data. At the same time, U.S. crude oil production remained at a record high of 11.1 million barrels per day.
Gasoline stockpiles fell by 500,000 barrels during the week-ending September 28, while distillate stockpiles declined by 1.8 million barrels, according to the EIA. Traders had forecast supply declines of 672,000 barrels in gasoline and 1.83 million barrels in distillates.
With the emergence of the news that Saudi Arabia and Russia will boost output, the crude oil market just got a little tricky because prior to the news, the primary focus was on a supply shortage.
Analysts expect the U.S. sanctions against Iran, which kick in on November 4, to take as much as 1.5 million barrels per day of supply out of markets. Saudi Arabia, Russia and several allies were expected to increase production by 1.4 million barrels per day. This would leave a short-fall. Today’s news means that the gap between the cuts and the production hikes would tighten this gap. This is potentially bearish news.
Furthermore, demand concerns are also becoming an issue. According to reports, high oil prices and weakening emerging market currencies are creating a toxic inflationary mix that could erode fuel demand and economic growth.
While the WTI and Brent markets could continue to be underpinned due to the uncertainty ahead of the start of the Iranian sanctions on November 4, we could start to see a sideways to lower trade until then due to the rapidly rising U.S. Dollar and a drop in demand from emerging markets who can’t afford to buy dollar-denominated crude oil.