Speculators play bigger role on downward sentiment

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Speculators play bigger role on downward sentiment

So far, oil prices have responded to geopolitical factors in a relatively calm fashion, with prices still remaining in the $70-$80 range. However, talk about oil price volatility seems to be in fashion. Price volatility became much steeper in the past two weeks.

This sets the stage for speculative activities. By week closing, oil prices moved down despite strong fundamentals and geopolitical tensions.

Downward sentiment could mean speculators will have a bigger role in oil price movements, though in truth, the oil price slump followed equity market weakness. More importantly however, speculative flows have started moving toward the short side in crude oil. Consequently, there might be some further softening to come out of crude. Even if someone thinks that net short positions might start building, and mostly likely bottoming out in coming weeks, speculators will take advantage of the bigger swing in oil prices on the upward movement.

Brent oil futures fell to $77.62 per barrel, about 10 percent down since the beginning of the month. Despite such a large loss, Morgan Stanley forecast Brent crude to reach $85 per barrel by the end of this year. WTI fell to $67.59 per barrel.  

The latest increase in inventories and the lower economic growth outlook might encourage OPEC and non-OPEC producers to alter their production strategy. However, it could be premature for OPEC+ to revise their output strategy since the output cut compliance was eased to 111 percent and there is still room to bring it down to 100 percent, as agreed during June’s meeting. The highest output cut compliance percentage was achieved last May with 167 percent, cutting 1.971 million barrels per day.

Although oil demand has already breached the 100 million barrels per day barrier, supply is not quite there yet. Unannounced, small supply deficits could occur, with global oil supply falling back in the coming months, led lower by further falls in Iran’s output, regardless of any seasonal demand lows. That is a caution to whomever is claiming that an upcoming weak economic situation and gloomy demand outlook will lead to lower prices. There are many factors to consider. 

EIA’s October 2018 Short-Term Energy Outlook (STEO) forecast Brent crude oil spot prices, which averaged $79 per barrel in September, to average $81 per barrel in the fourth quarter of 2018, before falling to an average of $75 in 2019. The October STEO assumes that the effects of sanctions will increase during the first few months of full implementation and that Iran’s average crude oil production, excluding condensate, in 2019 will fall by about 1.0 million barrels per day from Iran’s April 2018 production level of 3.8 million barrels per day. This decline is similar to the drop that occurred in 2012 when sanctions on Iran were imposed.

• Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco.  Twitter: @faisalmrza

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