Crude oil weekly recap, September 29 – October 3

WTI and Brent futures slid this week, pressured by technical liquidation at the end of the quarter, strong dollar and speculation that Saudi Arabia is not looking to support prices. Bearish fundamentals were again the main protagonist in crudes story, with questionable demand outlooks and firm supply side.

WTI crude for delivery in November on the New York Mercantile Exchange lost 1.40% on Friday to settle the week ~4% lower at $89.74 a barrel. Meanwhile on the ICE, Brent November futures dropped 1.19% on Friday to close at $92.31 a barrel, registering a ~5% weekly loss. November Brent’s premium to its US counterpart narrowed to at $2.57.

“I am looking for WTI to establish a floor possibly as low as $85, which could possibly take Brent to $88,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said for Bloomberg. “The Brent-WTI spread would probably end up staying at $2 or $3. US production is going to continue to increase.”

Crude slumping again on Tuesday, logging the worst day in almost two years, with both benchmarks closing for ~3% loss, was the main drive this week. Analysts agree that a complex of factors contributed to the slump. A four-year strong dollar, weakening demand outlooks in Europe and China, second- and third-top oil consumers, respectively, rising output from OPEC and technical covering at the end of the quarter were all cited as possible factors.

Demand outlook

The key figure on US nonfarm payrolls for September was released Friday, revealing the US economy had added 248 000 new jobs, compared to expectations of a 215 000 reading, boosting the US dollar to a new four-year peak. Meanwhile, the unemployment rate was logged at a six-year trough at 5.9%, also beating expectations.

The rallying dollar again pressured commodities across, reversing much of any brief gains for crude and adding to bearish sentiment.

Key data on China was posted this week, with both HSBC and the Chinese government seeing growth in China’s factory sector last month. The factory sector is a leading oil demand gauge, as manufactured goods need transportation and factories themselves require a significant amount of fuel or power. In China especially, the factory sector is a massive part of the economy, accounting for more than 40% of GDP, while China itself accounts for about 12% of global crude demand.

Meanwhile, Eurozone manufacturing PMI, also posted this week, was the latest in the string of bearish data, with the Bloc barely logging growth in the factory sector in September, while Germany posted a contraction for the first time in fifteen months.

The more important factors for crude this week were, again, on the supply side, with, again, focus on Saudi Arabia and OPEC.

“Supply is plentiful and demand is not keeping up with supply now,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said for Bloomberg. “That’s the fundamental equation and it looks more likely that we’ll continue to go lower.”

Saudi price cut

Markets were pressured by somewhat shocking news from Saudi Arabia since Wednesday. The world’s top crude exporter cut the list price of its crude for Asia, Europe and North America. The news caught the market off guard, erasing the positive sentiment from a bullish Energy Information Administration (EIA) weekly US oil report.

Some market analysts had expected Saudi Arabia to cut output, and lift global crude prices, to accommodate smaller OPEC members, though at the cost of its own market share. The Kingdom is the only oil exporter with sufficient production with quick-shut capabilities, which makes possible significant, and timely, production cuts, or increases, which could significantly impact global prices.

“There’s need for strong production cuts, and the only country that can deliver that cut is Saudi Arabia,” Carsten Fritsch, commodity analyst at Commerzbank AG in Frankfurt, said for The Wall Street Journal. “A price drop below $90, maybe $85, will cause alarm bells.”

The price cut, however, indicates that Saudi Arabia is not keen on suffering to keep other OPEC members afloat, and global prices will probably have to dive deeper to stoke a reaction from the Kingdom, pressuring crude contracts.

Last month both OPEC and the International Energy Agency (IEA) lowered their projections of crude demand in 2015, amid growing supplies from Libya, Iraq and most notably – the US, stoking worries on the market to send futures tumbling.

Continued air strikes in Syria failed to widen the risk premium, as investors now shrug off the possibility of the situation complicating and potentially escalating. Meanwhile, output in Iraq, OPEC’s second-top exporter, and Libya firmly kept to recent gains, adding supply pressure to an already oversupplied market.

“OPEC appears to be gearing up for a price war,” said Mr Fritsch. “We therefore do not expect prices to stabilize until this impression disappears and OPEC returns to co-ordinated production cuts.”

Meanwhile, Russian state-owned Rosneft, the world’s largest oil producer, announced a billion-barrel oil find in the Arctic was confirmed, signaling that Western sanctions, which explicitly targeted Moscow’s Arctic scope, will not impede expansion.