Oil Markets Show Weak Fundamentals

Fresh news of the continued growing supply of oil and the weakening demand in China caused the price of crude to begin this week with a plunge. And investors can see little relief in the future, as Iran prepares to return to the market.

An index for Chinese factory production, issued Aug. 3 by Caixin Media and Markit Economics, gave the country a productivity score of 47.8 in July, down from 49.4 in June – a two-year low. And China’s official Purchasing Managers’ Index was given a rating of 50 in July, down from 50.2 in the previous month. Purchasing is expanding only if the index rating is 50 or above.

Manufacturing in China stalled in July, reflecting weakening demand for Chinese goods, not only domestically, because of the recent 15 percent drop in China’s stock markets, but also from foreign customers.

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At the same time, market speculators, including hedge funds, are betting less on the future price of West Texas Intermediate (WTI) crude, the benchmark for American oil, as drillers in the United States keep adding rigs and extracting oil despite the already saturated market.

In the meantime, OPEC members are pumping at what appears to be a frantic rate, showing a willingness to sacrifice the price of oil in exchange for reclaiming the market share they’ve lost to oil from the United States. OPEC countries are exceeding their self-imposed collective limit of 30 million barrels per day by as much as 2 million barrels per day.

Further, OPEC appears not to have devised a way to make room for Iran’s return to the oil market, which is expected early next year, now that it’s reached an agreement with six world powers over its nuclear program. As a result, sanctions on Iran are expected to be lifted, probably late this year or early in 2016.

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Iranian Oil Minister Bijan Zanganeh said July 31 that once the sanctions are removed, his country will be able to increase production of crude oil to pre-sanctions levels – by 500,000 barrels per day within a week, and by more than 1 million barrels per day within a month.

In an interview with Reuters, Tamas Vargas, an analyst at the London-based oil brokerage PVM Associates Ltd., summed it up grimly: “The Reuters survey on OPEC production is bearish, rig count is bearish. … [T]he dollar is a touch stronger and the Chinese stock market is also down.”

All this bad news showed up by midday on Aug. 3: North Sea Brent crude for September delivery was down to $51.07 per barrel on London’s ICE Futures Europe Exchange – 20 percent below its high so far this year, which it reached on May 6.

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At the same time, WTI was down to $46.26 per barrel, a loss of 86 cents, in electronic trading on the New York Mercantile Exchange, its worst showing since March 23. Prices for WTI are down by 13 percent this year so far.

This has investors worried, to say the least, Bjarne Schieldrop, the chief commodities analyst for SEB AB bank in Oslo, told Bloomberg. “The Iran deal is not 100 percent done, but it’s definitely much, much closer,” he said. “We’re running a 2 million-barrels-a-day surplus this year -- it’s basically crushing the oil price, and something has to give.”

By Andy Tully Of Oilprice.com

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