Oil extended losses after Saudi Arabia cut crude prices for Asian buyers, raising the prospect of fierce competition among sellers as the resurgence of Covid-19 continues to cloud the demand outlook.
Futures in New York fell 0.6% to below $69 a barrel. The kingdom cut the price of its flagship crude for October just days after OPEC+ agreed to continue boosting production. Traders were caught off guard by the Saudi move, attributing it to factors including increased competition and a desire to retain market share.
“The Saudis cut the price to Asia by more than expected,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S. “This obviously raises speculation whether they’re looking for market share or whether they see a weak demand situation that requires a lower price in order to stay competitive.”
Oil’s sizzling rally over the first half of the year has been interrupted by the delta variant of the virus, which has led to renewed restrictions on mobility. Adding to bearish sentiment recently has been the readiness of governments to release strategic reserves, reducing the need for supplies from the market. Still, a significant chunk of U.S. production remains offline in the Gulf of Mexico following Hurricane Ida.
Last month, some Asian customers requested less crude from Saudi Arabia due to the demand impact from delta. For October, Saudi official prices for cargo sales to the U.S., northwest Europe and the Mediterranean were stable or little changed, pointing to the producer’s intent on prioritizing oil flows to Asia.
Traders are closely watching for the return of oil production and refineries affected by Ida. The U.S. gave the second refiner in Louisiana access to the country’s emergency crude stockpiles as most oil-producing platforms in the Gulf of Mexico aren’t back up.
It remains challenging for analysts and traders to form a cohesive picture of the global demand outlook due to the continuing spread of the virus. Fuel consumption in the U.S. has climbed to a record, European demand is rising while crude inventories at key storage hubs such as Saldanha Bay in South Africa have dipped, a sign that the pandemic-induced glut is quickly dissipating.
“The market will be looking for clues from the demand side as the Covid-19 variants are still spreading and are causing concerns over the trajectory of the oil demand recovery,” Rystad Energy’s head of oil markets, Bjornar Tonhaugen, wrote in a note.
Oil Holds Near Highest Since 2018 With Global Markets Tightening
Oil held steady near the highest close since 2018, with the global energy crunch set to increase demand for crude as stockpiles fall from the U.S. to China.
Futures in London headed for a third weekly gain. Global onshore crude stocks sank by almost 21 million barrels last week, led by China, according to data analytics firm Kayrros, while U.S. inventories are near a three-year low. The surge in natural gas prices is expected to force some consumers to switch to oil, tightening the market further ahead of the northern hemisphere winter.
China on Friday sold oil to Hengli Petrochemical Co. and a unit of PetroChina Co. in the first auction of crude from its strategic reserves said traders with the knowledge of the matter. Grades sold included Oman, Upper Zakum and Forties.
Oil has rallied recently after a period of Covid-induced demand uncertainty, with some of the world’s largest traders and banks predicting prices may climb further amid the energy crisis. Global crude consumption could rise by an additional 370,000 barrels a day if natural gas costs stay high, according to the Organization of Petroleum Exporting Countries.
“Underpinning the latest bout of price strength is a tightening supply backdrop,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd.
Various underlying oil market gauges are also pointing to a strengthening market. The key spread between Brent futures for December and a year later is near $7, the strongest since 2019. That’s a sign traders are positive about the market outlook.
At the same time, the premium options traders are paying for bearish put options is the smallest since January 2020, another indication that traders are less concerned about a pullback in prices.
Oil Gains 1 Percent on Possible Tight Supply
Oil prices rose on Tuesday as analysts pointed to signs of U.S. supply tightness, ending days of losses as global markets remain haunted by the potential impact on China’s economy of a crisis at heavily indebted property group China Evergrande.
Brent crude gained 95 cents or 1.3% to $74.87 a barrel by 0645 GMT, having fallen by almost 2% on Monday. The contract for West Texas Intermediate (WTI) , which expires later on Tuesday, was up 91 cents or 1.3% at $71.20 after dropping 2.3% in the previous session.
Global utilities are switching to fuel oil due to rising gas and coal prices, and lingering outages from the Gulf of Mexico after Hurricane Ada that imply less supply is available, ANZ analysts said.
“While slowing Chinese economic growth and uncertainty around the (U.S.) Fed’s tapering timetable weighed on market sentiment, other developments still point to higher oil prices,” ANZ Research said in a note.
Still, investors across financial assets have been rocked by the fallout from heavily indebted Evergrande (3333.HK) and the threat of a wider market shakeout in the longer term.
“Evergrande’s woes are threatening the outlook for the world’s second-largest economy and making some investors question China’s growth outlook and whether it is safe to invest there,” said Edward Moya, senior market analyst at OANDA.
While that view of the state of China’s economy is weighing on markets, the U.S. Federal Reserve is also expected to start tightening monetary policy – likely to make investors warier of riskier assets such as oil.
Crude Oil Drops as U.S Dollar Extends Gain
Oil prices declined on Monday after the United States Dollar rose to a three-week high and the U.S oil rig count increased amid drop in U.S. Gulf of Mexico output.
Brent crude oil, against which Nigerian crude oil is priced, sheds $1.03 or 1.37 percent to $74.31 per barrel at 9.38 am Nigerian time. While the U.S West Texas Intermediate oil declined by $1.18 or 1.64 per barrel to $70.79 a barrel.
The recent increase in dollar strength against global currencies has dragged on crude oil outlook as energy investors cut down on imports to avoid possible market headwinds. Strong U.S. dollar priced crude oil is more expensive for holders of other currencies.
U.S dollar rose to a three-week high after retail sales unexpected rose by 0.7 percent in the month of August. The increase bolstered expectations that the U.S Federal Reserve will start cuttiing down on asset purchases later this year.
“U.S. consumption is not slowing as quickly as it appeared a month ago despite the fading stimulus, and the Delta variant did not much affect the industries feeding into retail sales,” said Chris Low, chief economist at FHN Financial in New York. “The economy continued to hum in August.”
According to the researchers at ING Bank, strong US dollar over the last few days has provided some headwinds to the market.
Also, an increase in U.S rig count to 512 in the week ended September 17, 2021 clouded the oil market. Oil rige rose by 9, the highest since April 2020.
Still, as at Friday 23 percent of U.S. Gulf of Mexico crude output, or 422,078 barrels per day, remained shut, stated the Bureau of Safety and Environmental Enforcement.
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