The Bears Are Back – Oil Slides On Negative Sentiment

Yves here. The most interesting part of this report is the sharply downward revision in EIA’s estimate for gasoline demand. EIA typically has a bullish bias. However, the magnitude of change, which presumably reflects expectations for summer driving, may show that consumer vacation spending is softer than expected.

By Nick Cunningham, a Vermont-based writer on energy and environmental issues. You can follow him on Twitter @nickcunnnigham1. Originally published at OilPrice

After oil prices rallied more than 80 percent between February and June, WTI and Brent have fallen back more recently, dropping from above $50 to just $45 per barrel. Oil traders are searching for more clarity on what to expect next, but the cacophony of data pointing in different directions is leading to confusion for analysts and speculators.

On the bullish side for oil prices is Citigroup, which published a research note on Monday saying that it is “especially bullish” on commodities in 2017. Citi says that the oil markets continue to balance, and the concerns over global economic growth are not as important as the demand trajectory. Moreover, the crash in oil prices has forced the industry to make cuts that will only sow the seeds of the next boom. “The oil market is treading water for now, but the oil price overshot to the downside earlier this year and this is clearly setting the stage for a bullish end to the decade,” Citi analysts, led by Ed Morse, said.

That optimistic outlook is countered by an array of voices on the other side worried about a renewed slump for crude oil. Let’s look at just a sampling of a few of the warnings signs.

The oil rig count in the U.S. jumped once again on last week, rising by 10 to 351, according to Baker Hughes. Oil rigs are now up by 35 since touching a low at the end of May. The prospect of new drilling is causing some concern in the markets about a return of supply. Also, while the Brexit worries may be overdone, the political uncertainty in Europe is contributing to a rally for the U.S. dollar, which is pushing down oil prices.

Meanwhile, Morgan Stanley says that global refiners are overproducing, churning out more refined produce than the world needs. A glut of gasoline or diesel will push down crude prices as refiners will eventually be forced to trim production, which means they will buy less crude. Morgan Stanley is backed up by the stubbornly high levels of gasoline inventories, which have refused to substantially fall in recent months despite widespread expectations of robust demand. This comes on heels of a remarkable downward revision by the EIA of gasoline demand in the United States. The energy agency lowered April demand by 260,000 barrels per day, suggesting American motorists are not consuming gasoline as vigorously as previously thought.

Also, storage levels of gasoline, diesel and heating oil in Europe are filling up, causing delays in deliveries. Reuters reported that oil shipments on the Rhine in Germany are having trouble unloading because storage was too full.

One other major bearish factor looming over oil prices is the return of Libyan supply. The two rival oil companies in the eastern and western sections of the country, backed by different governments, decided to put their differences aside earlier this month, announcing their decision to merge.

The merger is a major political breakthrough for a country that has been torn apart since the overthrow of Muammar Qaddafi in 2011. The deal could lead to the reopening of several of Libya’s major oil export terminals, unleashing long-sidelined supplies back onto the oil market. “After the unification of NOC, the opening of the ports and the increase of production are absolutely our top priorities,” the chairman of the National Oil Corporation Mustafa Sanalla said in an interview posted on the company’s website.

It is not a foregone conclusion that the merger of the two national oil companies will lead to a huge ramp up in production. After all, the deal does not cover the oil fields where oil is produced, but only covers the NOC’s budgeting, governing structure, and relocation of its headquarters to Benghazi. The deal also recognizes the Presidency Council in Tripoli in the west as the highest executive authority while the parliament in the east as the highest legislative authority. Agreement on recognizing those institutions will help build political unity and reconciliation.

And while the deal says very little about how much oil will be produced upstream, reconciling the two companies does increase the chances that the oil ports will be reopened. “We have heard hopeful noises in recent days about the opening of the ports,” Sanalla said.

Libya has four main oil ports that have been closed for more than a year, with a combined export capacity of 860,000 barrels per day. Libya produced 320,000 barrels per day in June, but could double that in a relatively short period of time.

In summary, the four-month oil price rally between February and June has come to a halt. WTI and Brent have dropped from just over $50 per barrel down to $45 per barrel. And the bears are back. Hedge funds and other money managers have slashed their net-long bets on oil to their lowest levels in four months. “Sentiment on the oil market is turning negative,” analysts at Commerzbank said, according to the WSJ. “[Investors] appear to have eyes only for bearish factors again.”