A Moment Of Rationality In Oil Market? No, Just That Market Sentiment Has Peaked

Oil prices reaches their highest level for almost four yearsThe new US sanctions could remove between 200.000 and 300.000 barrels of Iranian crude from the market

Analyst Norbert Rücker, Head Commodity Research at Julius Baer makes two observations about oil market these days.

On the one hand, the US official weekly petroleum market report usually is the point of reference to gauge the supply situation on the oil market due to its accuracy and timeliness. Rücker explains:

The hurricane season, however, dilutes the report’s information potential and temporarily makes it more difficult to find evidence for the market tightening narrative. The global oil surplus declined throughout summer largely on the back of receding US oil inventories.

The data published yesterday showed a substantial drop in crude oil inventories as hurricane Nate delayed imports. These distortions, in the expert’s opinion, however, also blur the seasonal fundamental soft patch the oil market has moved into with refineries slowing purchases for autumn maintenance.

Meanwhile, the increased geopolitical uncertainties with regards to Kurdistan’s independence vote and the US pressure on the Iran nuclear deal were unable to meaningfully support oil prices. This is somewhat of a surprise as geopolitical risks usually boost commodity market sentiment. Fundamentally, the Kurdistan-related disruption risk remains low. Turkey is less likely shut down oil pipelines after Baghdad seized control over the oil fields surrounding Kirkuk, which seemingly happened without damage. Also, the Middle East has ample spare capacity to offset any supply shortfall.

However, Rücker does not believe that the oil market has its moment of rationality.

Instead the muted price reaction possibly indicates that market sentiment has peaked. The excessive hedge fund long positions in the futures market warrants profit taking risks and is the main reason for our cautious stance and short position in oil.

 There is no lack of wild cards on the oil market but the uncertainties seem more than anticipated in the exceptionally bullish market mood. We see oil prices falling back into the trading range between USD 45 and 50 per barrel. The seasonal soft patch should challenge the market tightening narrative while the market mood can only deteriorate from today’s levels.