Institutional traders in oil and fuels became net sellers after weeks of buying crude and fuel futures as higher oil prices triggered a rush to take profit.
Reuters' market analyst John Kemp reported in his latest column that funds and other large oil traders had sold the equivalent of 25 million barrels of oil and fuel futures in the week to September 26 after buying a cumulative 155 million barrels in the prior three weeks.
The selloff came as both Brent and West Texas Intermediate hovered above $90 per barrel thanks to the supply squeeze from OPEC+ and unwavering demand. On Monday, however, as funds continued to sell, WTI slipped below $90 to close at around $88 per barrel, and the December contract for Brent started its trade at a little over $90 per barrel.
It is interesting to note that WTI slipped despite a close-to-critical situation with inventories at Cushing, Oklahoma. These fell to less than 22 million barrels at the end of September, prompting concern that the stock will become unusable because of the physical difficulties in pumping oil from near-empty tanks.
"If you let the crude (level) drop too low, the crude can get sludgy and you can't get it out. What does come out - you won't be able to use," Wood Mackenzie sales director Carl Larry told Reuters last week.
While the situation at Cushing drove prices higher in the past couple of weeks, now it seems that traders are once again turning towards demand as clouds gather over the global economy more thickly.
"The global outlook is quickly taking a turn for the worse and that is both driving the king dollar trade again and weighing on the crude demand outlook," OANDA analyst Edward Moya told Reuters on Monday.
The U.S. dollar surged on Monday after Congress managed to clinch a deal for a 45-day extension of federal government funding, averting a shutdown. A higher dollar dampens demand for oil among buyers because it makes the commodity costlier in local currencies.
Even so, appetite for U.S. crude and diesel remains high, Reuters' Kemp noted in his column, precisely because of the supply situation. In diesel, supply remains below historical averages for this time of the year, keeping traders interested.
This appetite could prove lasting in light of recent signals coming from the U.S. shale patch. These signals indicate shale drillers have no intention of turning back into growth mode wherever prices are going.
"I just don't see producers getting all excited about near-term price and I think we are going to see continued [price] volatility," Devon Energy's chief executive, Rick Muncrief, told the Financial Times.
He then went on to predict that oil prices could retreat in six months to a year and that there was uncertainty about whether this retreat might be caused by a recession hitting oil demand.
In the short term, this unwillingness to boost production means the upside potential for prices remains considerable, especially since OPEC+ is expected to maintain its output cuts at its next meeting on Wednesday.
Despite speculation that Saudi Arabia may begin to unwind its 1-million-bpd production cuts, Riyadh confirmed on Wednesday morning that it would do no such thing.
Given the effect pure speculation had on prices, Saudi Arabia was perhaps wise not to alter its production policy. This would be particularly true right now when concern about demand destruction due to macroeconomic factors is also pressuring prices amid the continued slowdown in the eurozone, Germany, and the UK.
By Charles Kennedy for Oilprice.com
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