INSIGHT: Crude price rally hits the buffers and retreats

22 August 2016 19:42 Source:ICIS News

By Nigel Davis

LONDON (ICIS)--The sharp rise in oil prices appears to have run out of steam on Friday and certainly on Monday as Brent fell back and the WTI benchmark followed suit.

The upward pressure on prices had built over the past fortnight despite crude still being in over-supply. But by Friday, the notion that soon-to-be-held informal meetings between OPEC members and Russia in Algeria might lead to production cuts had given way to a clearer reality, and there was some profit taking

It has been a remarkable few weeks with crude futures prices rising sharply. In a little over a fortnight prices moved from $40/bbl to $50/bbl.

But while both benchmarks gained some ground on Friday the rally looked as though it had run out of steam looking for “inspiration and direction”, according to ICIS.

Dated Brent crude price

That direction could still well be up but the pressure had built for a sharp decline that was delivered on Monday. Talks between OPEC and Russia have stalled in the past and some analysts believe that the bigger picture is the argument between Saudi Arabia and Iran, with Iran wanting to increase supply.

The ability of the US to act as a swing producer in a market that OPEC wants to see at around the mid $40s/bbl is likely to be tested. The US rig count had risen for the eighth week in succession, data showed last week.

The pressure is on oil to trade in a relatively tight range with upward speculative pressure tempered by low demand growth.

Eleven days ago the International Energy Agency (IEA) reduced its oil demand outlook citing a “dimmer macroeconomic outlook” but expected somewhat higher demand in the second half of the year.

The crude-oil glut had returned to the headlines although the agency’s balances showed essentially no oversupply. Its data highlighted the fine balance in the oil market.

But crude futures prices saw a significant increase over the course of last week with Brent rising over the $50/bbl threshold for the first time in six weeks.

Futures were trading close to the highest level since early July, buoyed by the prospect that members of the Organization of the Petroleum Exporting Countries (OPEC) and other major producers including Russia would meet in September to discuss a possible freeze in output levels in order to address the perceived oil glut and to bolster prices.

However, at the start of this week, hopes over a positive outcome of the talks had already begun to fade with analysts believing that fundamental disagreements between  OPEC-members Iran and Saudi Arabia means any potential deal is an unlikely one.

The issue of oversupply for oil and refined products in the market also looks far from being solved with China's exports of diesel and gasoline rising in |July alongside the US rig count increase

Another important factor impacting the price oil is the US dollar. A stronger dollar makes dollar-denominated commodities more expensive, upsetting demand, and would normally push oil prices downwards. Although the US dollar had been weak against a handful of other currencies over recent weeks, it strengthened on Monday.

ICIS data showed on Monday the impact of higher naphtha costs on polymer margins in Asia and Europe, although naphtha price increases in Asia had been tempered by weaker demand from crackers offline for routine maintenance.

Petrochemical prices have been remarkably stable relative to crude and naphtha price movements over the past six months and more suggesting that product demand growth is not strong.

IPEX to Brent crude from January 2015

Petrochemical and polymer price gains were made in the crude price rally between February and April but have been lost and remained flat since. The crude price increase is not yet reflected in the ICIS petrochemicals price basket.

Additional reporting by Franco Capaldo and Jonathan Lopez

By Nigel Davis