Oil retreats as period of oversupply seen on horizon

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With the U.S. government shutdown now in its second day, market participants around the globe remain in a high level of uncertainty as market risk is slowly edging higher. At the moment there is no indication that the stalemate in Washington, D.C. will be over anytime soon as all sides appear to be relatively inflexible in their current position as both Republicans and Democrats seem to be more concerned about the so-called court of public opinion over who is to blame for the shutdown. Until that process is over, a continuing budget resolution is not likely to get through Congress and thus the government will remain in a shutdown mode.

On the fundamental front, oil (NYMEX:CLX13) remains in negative territory after a much larger than expected build in crude oil stocks reported by the API late yesterday afternoon (see below for more details). Oil prices have declined for the last several weeks as the supply issues that have been impacting the global balances seem to be starting to get resolved. With both Russia and Saudi Arabia (two largest oil producers in the world) both producing at very high levels for September, oil seems to be heading for a period of oversupply and thus inventory replenishment as we saw in last night’s API data.

On the geopolitical front Iran’s Parliament has strongly endorsed President Rouhani’s diplomatic bid to dispel mistrust at the UN meeting last week according to an article in Reuters today. Iranian media said that the backing from the assembly, controlled by factions deeply loyal to the Supreme Leader Khamenei, is a further sign that Rouhani has the support of the Iranian establishment. In my view yet another sign that Iran is still saying and currently doing all of the right things to get the attention of the west in their effort to have the sanctions eased.

Until the west and Iran get down to discussing the details of a negotiated settlement it is still a big unknown to say if and when sanctions will be eased and when shut-in Iranian oil will begin to flow. For now I would categorize all of the positives coming from Iran as mildly bearish for the oil markets as more participants are starting to slowly adjust their view toward Iranian oil flowing at some point of time in the medium term.

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