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James Hyerczyk
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Crude Oil
Crude Oil

U.S West Texas Intermediate and international-benchmark Brent crude oil settled sharply higher last week as investors continued to debate the supply situation with the bulls feeling that Iran sanctions could curb output and the bears pointing to signs of oversupply. With the markets trading at nearly 50% of their summer price range, the action suggests a balance market with a slight bias to the upside.

October WTI crude oil settled the week at $68.72, up $3.51 or +5.38% and November Brent closed at $76.13, up $4.06 or +5.337%. Both finished the week higher for only the third time in nine weeks.

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An escalating trade war between China and the United States continued to raise concerns about lower demand. Additionally, worries that Mexico’s incoming administration would not strike a bilateral agreement over NAFTA with the U.S. also weighed on the market, traders said.

Iran Sanctions

Worries that the sanctions on Iran will cut significant volumes of crude from the market underpinned prices last week. Bullish traders believe the tight supply/demand situation makes the market vulnerable to any supply disruption. Traders are particularly concerned about the supply side of the equation because of the looming U.S. sanctions against Iran, which will target oil exports from November.

According to early estimates, the sanctions are expected to strip about 2.5 million barrels per day (bpd) of crude and condensate this year from the market, or about 2.5 percent of global consumption. Analysts also note that Iran is already experiencing a slowdown with tanker loadings already down by around 700,000 bpd in the first half of August relative to July. This is currently ahead of expectations.

Analysts are also saying that during the fourth quarter of 2018, the market will be facing an issue with either undersupply, dwindling spare capacity or both.

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Increasing Demand Worries

While the bullish headlines are driving the price action this week, some traders are still expressing caution due to concerns over Chinese demand and the impact of the US – China trade dispute. The low-level trade talks ended on Thursday with nothing major accomplished. Instead, both countries activated another round of dueling tariffs on $16 billion worth of each other’s goods.

Nonetheless, sources told Reuters on Thursday that China’s Unipec will resume purchases of U.S. crude oil in October after a two-month halt due to the trade dispute. This surprise news puts further emphasis on the supply side of the equation.

Weaker Dollar Supportive

This week, bullish traders have more than recovered last week’s steep sell-off that was fueled by demand concerns and a stronger U.S. Dollar. It seems weak long investors may have panicked last week during the height of the financial crisis in Turkey. Once concerns dampened on August 16, buyers regained control, buying with confidence for seven consecutive sessions on the daily chart since hitting its lowest level since June 21 at $63.89.

Another Bullish EIA Report

On Wednesday, the U.S. Energy Information Administration (EIA) announced that U.S. commercial crude oil inventories fell by 5.8 million barrels in the week to August 17 to 408.36 million barrels. Additionally, the EIA said that U.S. crude oil output rose back to 11 million barrels per day, but this had little effect on the bullish response to the inventories data.

Other News

According to General Electric’s Baker Hughes energy services firm, U.S. energy companies cut nine oil drilling rigs last week, the biggest reduction since May 2016.

Traders are also watching a potential supply disruption in the North Sea, where workers are planning three oil and gas platform strikes for next month. Oil production will stop during the strikes, which means about 45,000 to 50,000 barrels per day will be taken off the market.

Forecast

Traders are going to continue to argue over supply since the impact of the Iran sanctions won’t be known until November. In the meantime, the bears will continue to try to build a case for a drop in demand because of the trade dispute. The wild cards this week will be worries over the impending strike which will strip more supply from the market, and the U.S. Dollar. A weaker dollar could drive up foreign demand for dollar-denominated crude oil.

For WTI traders, the key level to watch is $67.12. This is the market’s balance point. Brent traders will focus on $75.69 to $74.74. A sustained move over $75.79 will suggest an upside bias. A sustained move under $74.74 will be a sign of selling pressure.

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