Crude oil prices are having a hard time trying to decide whether they should be focused on risks to supply or risks to demand. Early on Friday it appears that the risk to demand fears are outweighing risks to supply fears as the dollar rallies and economic concerns weigh.
Once again bearish news is hitting the crude oil complex and once again the market is hardly reacting to it. Reuters is reporting that some Canadian oil sands production restarted while the API reported yet another new all-time record high level of total combined inventories of crude oil and refined products.
Crude oil prices rebounded yesterday as the global risk to supply is risng at a time when global production may start falling. Not only are markets trying to assess the long term effect from the Alberta Canadian wildfires, but increasing risk to supply in Nigeria is making traders nervous. On top of that, Iran is signaling that it are ready to talk about a production freeze and the Energy Information Administration raised its price forecast for crude while predicting record U.S. gasoline demand.
Crude oil prices are drifting lower for the third trading session in a row after rising for the previous four weeks in a row. The market sentiment may be experiencing a change in the short term as the current fundamentals remain simply bearish. The upside momentum driven by the perception view than the market is already in a rebalancing pattern is slowing. The majority of the current bearish fundamental data hitting the media airwaves over the last week or so has pushed the perception view to the background for the near term.
WTI and Brent are now at the highest level of the year as even this week’s fundamental snapshot (basis API) was bullish. The battle of views continues with the view that the market is already in a rebalancing pattern continuing to dominate the narrative as well as the short-term direction of the market. Unless there is a more consistent pattern of bearish current fundamentals the upside rally is likely to continue.
Crude oil prices are retracing this morning after another build in U.S. crude oil stocks reported by the API late yesterday afternoon along with news that the Kuwait oil workers’ strike is over after three days. Kuwait production is going to ramp up quickly with Reuter’s reporting that production already increased by 500,000 bpd today with expectations that Kuwaiti production will reach the average March level in a few more days.
President Obama is landing in Saudi Arabia to try to smooth over sour relations with America’s long-term ally, Saudi Arabia. While the crude oil market is selling off overnight on renewed concerns about China’s economy and the ending of the Kuwaiti oil strike, this meeting today may have more of a long term impact on the future of oil prices then some of these short term factors.
Crude prices are mixed with crude oil and heating oil starting the trading session in negative territory while gasoline is positive on the day. The main driver in the overnight trading period and into this morning is the mixed inventory report released by the American Petroleum Institute late yesterday afternoon. They reported a huge build in crude oil stocks (but a draw in Cushing) with declines in refined product inventories.
As crude oil prices mount a rebound against a backdrop of oil company bankruptcies and rig count cuts, the focus turns to how quickly U.S. energy producers will respond to rising prices. The bearish argument is there will be a cap on prices because as soon as prices start to rise, producers will bring rigs back on line and cap prices. Yet, this argument really does not address the longer term structural damage that has occurred in the energy space.