Oil prices take a dip on weak demand outlook

According to early morning reports, crude oil prices fell on Tuesday as bleak economic data from top crude buyer China renewed fears of a global recession. 

While Brent crude futures fell to US$94.37 a barrel by 0313 GMT, WTI crude futures dipped to US$88.97. Oil futures fell about 3% during the previous session.

China's central bank cut lending rates to revive demand as the economy slowed unexpectedly in July, with factory and retail activity squeezed by Beijing's zero-COVID policy and a property crisis.

"Commodities prices across the board were under pressure as China's July economic data painted a more downbeat growth picture than previously expected, which prompted renewed concerns on demand outlook," wrote Yeap Jun Rong, market strategist from IG Group in a note.

China's fuel product exports are expected to rebound in August to near a year high after Beijing issued more quotas, adding pressure to already-cooling refining margins.

Investors also watched talks to revive the 2015 Iran nuclear deal. More oil could enter the market if Iran and the United States accept an offer from the European Union, which would remove sanctions on Iranian oil exports, analysts said.

Iran responded to the European Union's final draft text to save a 2015 nuclear deal on Monday, an EU official said, but provided no details on Iran's response to the text. The Iranian foreign minister called on the United States to show flexibility to resolve three remaining issues.

In the United States, total output in the major US shale oil basins will rise to 9.049 million bpd in September, the highest since March 2020, the US Energy Information Administration (EIA) said in its productivity report on Monday.

Market participants awaited industry data on US crude stockpiles due later on Tuesday. Oil and gasoline stockpiles likely fell last week, while distillate inventories rose, a preliminary Reuters poll showed on Monday.

The premium for front-month WTI futures over barrels loading in six months stood at US$3.46 a barrel on Tuesday, the lowest level in four months, suggesting easing tightness in prompt supplies.

 

Is EIA reporting correct data about US oil stockpiles?

Ever since the talk about global oil glut has got louder, I have been trying real hard to find out the factors responsible for the prevailing oversupply. The recent stories published and aired suggest that OPEC, led by Saudi Arabia, is responsible for the steep fall in prices. The price per barrel has plunged to US$35 from its peak of US$147 and currently hovers around US$50. A question came to my mind, is Saudi Arabia the only culprit?

Having spent weeks on finding a plausible reason, I reached a very disturbing point. My conclusion is that the stories being published and aired by western media are based on a few premises, which are incorrect and misleading. The biggest factor that moves oil price is weekly US stockpile data released by the US Energy Information Administration (EIA). In the recent weeks, it has reported sudden rise and fall in US stockpiles, which resulted in high volatility in crude prices. Most of these spikes were reported at a time when the world was following OPEC-led effort to contain glut.

Today, I read shocking news that millions of barrels of oil produced in US remain unaccounted for. This raises a question, is EIA reporting correct data about US oil stockpiles? Ideally one should trust that EIA is not providing misleading information. However, keeping the track record of US intelligence agencies in mind; one has a reason to question the sanctity of the data disseminated by EIA.

The data released by EIA about crude oil inventories influences its price. If the increase in crude inventories is more than expected, it implies weaker demand and is bearish for crude prices. The same can be said if a decline in inventories is less than expected. If the increase in crude is less than expected, it implies greater demand and is bullish for crude prices. The same can be said if a decline in inventories is more than expected.

The reason for doubting the sanctity of data disseminated by EIA is little disclosure about shale oil production. The number of operating rigs reported by some service provider is still less than 500, as against an installed number of more than 1900 touched in 2014. This suggests that around one-fourth of installed rigs are operating for almost three years. What has the fate been of remaining three-fourth? How many of them have filed bankruptcy under Chapter 11? If no such report has been made public, one has all the reasons to doubt the authenticity of EIA data.

Morale of the story, EIA is diverting the attention of the world from US crude production to Saudi Arabia, Russia, Iran and Iraq to hold them responsible for the glut. One should also keep in mind that US has also been the biggest beneficiary of low crude oil prices, being the biggest consumer of energy.