Crude oil prices are stuck between a rock and a range with seasonal weakness, as well as the promise of more oil production, which is alleviating fears of a tightening global marketplace. On Friday, the market was looking for a reason to rally or break. It got the reason to break on a report by The Wall Street Journal that Russia’s Energy Minister Alexander Novak, who said he “did not rule out… an increase in oil production in excess of 1 million barrels a day may be discussed.”
Geopolitics has taken over the oil market, driving oil prices up to three-year highs. The inventory surplus has vanished, and more outages could push oil prices up even higher. Yet, there are some signs that demand is starting to take a hit as oil closes in on $80 per barrel.
The International Energy Agency (IEA), or as I call them the “demand downers,” once again are raising concerns about global oil demand. The agency that has consistently underestimated global oil demand is once again trying to keep their weak demand illusions in the spotlight. A few years ago, it was because that despite the low price, demand would be bad despite clear evidence to the contrary.
Looking for fear in the oil market? Look no further than the Brent versus West Texas Intermediate oil spread that blew out to the highest level all year and the highest since 2015, with Brent holding a $7.30 per barrel premium currently above WTI. European and Asian buyers of Brent are pricing in the risks and realities of the fallout from sanctions on Iran to increased tensions in the Gaza strip as well as the inability of traditional Brent oil producers to fill that void.
Both yellow and black golds are currently finding support from heightened fear among investors that the United States and its allies may soon launch a military strike against Syria. This is in response to the suspected chemical weapons attack in the country. The fear is that there might be counterstrike by Russia, which could further damage Moscow’s relationship with the West.
Market players marched into the 2017 trading year adopting a risk-on attitude, amid growing optimism over Donald Trump pushing ahead with a large fiscal spending package. The “trump effect” not only elevated global stocks to 19-month highs in January, but also sent the U.S. dollar to its highest level in 14 years.