Crude oil gets help from stock market bounce

Crude oil continues to stabilize after its near 30% jump up until last Monday, according to Ole Hansen, head of commodity strategy at Saxo Bank. The latest data from the Commitment of Traders (COT) report puts most of that rally down to short covering from overextended bears.

Hansen says that West Texas Intermediate (WTI) could be finding a new wide range, possibly around $45/barrel, but that evidence to stoke supply-glut worries lies nearly everywhere.

When US traders return today from Monday's Labor Day holiday, he comments, they will be presented with news that Russia will not support a coordinated effort with OPEC to cut production. On the supply side, surveys from the Atlantic point toward a surge in production in October. Loadings from both Nigeria and the North Sea look set to jump to their highest levels in three years, and it happens just around the time of year when refineries slow down for maintenance.

On the demand side, China's crude oil imports fell in August by 13.4% or the equivalent of 1 million barrels/day. This highlights the current unease about the impact that slowing growth will have on China's demand for raw materials over the coming months. The trade data overall showed a decline in both imports and exports, adding to the already existing growth pressure.

The Shanghai Composite index nevertheless managed to end almost 3% higher on Tuesday, and those gains carried into the European session while the pre-market in the US also points higher. So, despite the above-mentioned negative fundamentals, oil markets have taken their cue from improved sentiment across global stock markets, and that has sent Brent crude higher by 2.2% at 1135 CET.

The Wall Street Journal has an interesting article about how "strippers" could come to the rescue and help reduce the current supply glut, if they throw in the towel. The name “stripper” has been given to small independent US producers who move in when the big boys move out. They literally scrape the bottom of the barrel by stripping the last few barrels out of aging wells. It is estimated that, in the US, some 400,000 stripper wells produce around 1 million b/d.

The profitability of many of these small operations are under pressure from falling prices, not least because many of them must accept sizable discounts relative to WTI crude prices when selling their few barrels. Persistent low prices could put half of these producers out of business, and a supply reduction of 500,000 million b/d would go a long way in helping to stabilize the market.

After the slump and the subsequent recovery, the price of oil could now be settling into a new wide trading range, potentially around $45/b for WTI crude. Fundamentals remain weak, not least over the coming months when a slowdown in global refinery demand will add to supply.

“But on the other hand, demand from investors through exchange-traded products remains robust, while many financial traders in the futures market got a big bloody nose during August when the market rallied strongly against the odds,” Hansen says. “Such a move has now reduced the appetite to aggressively short, so we believe a potential return to the low $40s will be met by profit-taking.”


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