Oil: Erosion In Middle East’s Supply-Deal Confidence

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Energy markets has been taking a beating with oil and natural gas prices down across the board. For once, the fundamental news flow was ample. The US Energy Administration reported their weekly set of data, which showed a stronger-than-expected increase of crude oil and oil products in storage. “The tightening trend visible in May and June disappeared as of late, dampening the expectations that the market’s surplus finally started shrinking”, said Norbert Rücker from Julius Baer.

Confidence in the effectiveness of the Middle East’s supply deal was further undermined in the day by the International Energy Agency. The main messages of their latest report include increasing global oil stocks in April, rising production from the members of the Organization of the Petroleum Exporting Countries, and the statement that supply should exceed demand growth next year largely due to US shale. With the supply deal’s effectiveness increasingly questioned, we believe that downside risks to oil prices from an unorderly and early unwinding of the agreement have increased. Analysts explained:

We stick to our neutral view and see oil prices trading sideways, spending more time in the high 40s than the low 50s. For gold, it was a day of two halves. Prices rallied initially, benefiting from disappointing data out of the United States and a weaker dollar. Following the US Federal Reserve’s inter-est-rate hike and the announcement to start reducing its balance sheet this year, gold gave away all its gains and closed slightly lower. As we expect dollar strength to return over the coming months, we remain neutral on gold and expect prices to trade around USD 1,200 per ounce.