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16-06-2017

Oil Down Again as Analyst Declares "The Market is in Trouble"

Thursday's trading activity also sees a return of the mantra "lower for longer."

As oil settled lower yet again on Thursday due to the surprise build in U.S. inventories reported earlier this week, analysts are stating that a new price range has been reached and that "lower for longer" is the new norm everyone will have to get used to.

Brent settled down 8 cents to $46.92 per barrel, its weakest showing since May 5 and near six-month lows, while West Texas Intermediate settled down 27 cents to $44.46, after reaching a six-month low of $44.32 per barrel.

In summarizing the immediate market problems, Tariq Zahir, crude trader and managing member at Tyche Capital Advisors, said, "Libya and Nigeria have brought more oil online and that's really hindering" the Organization of the Petroleum Exporting Countries' (OPEC) efforts to improve the supply/demand balance.

But with no end of U.S. shale growth in sight as well as indications Iraq may well achieve output of a record 5 million barrels per day (bpd) in the near term (to name just two of many countries determined to pump full out), Zahir added, "I definitely think we're in a new trading range; unless you get some supply disruption, I think it's going to be lower for longer."

Many traders believe further price drops are imminent due to near record high inventories in many parts of the world, and this prompted Tamas Varga, analyst at PVM Oil Associates, to tell the Financial Post succinctly, "The market is in trouble."

But if most experts agree that OPEC is ineffective in lessening let alone solving the problem, it may be proving advantageous to self-interested parties seeking maintenance of their political power: that is the contention of Daniel Yergin, a leading geopolitical and oil analyst, who said Russian president Vladimir Putin is agreeing to the cartel's cutback strategies only because he wants to secure his political future.

Yergin remarked, "I was in St. Petersburg two weeks ago, and the sense you got is Putin is actually looking at his March 2018 election and wants economic stability; he doesn't want a kind of free-fall in prices."

As for Russia and Saudi Arabia recently agreeing to extend the duration of the cartel's cuts, Yergin said, "That's the pressure they're feeling; that's why they came together, and that's why what the Saudis wanted to see was Russia on board - and Russia got on board because of the same revenue thing."

But with a free-fall in prices being a possibility in a market as currently unstable as crude, the Saudis may want to pursue an alternative strategy if the OPEC extension is a bust, and John Kilduff, founding partner of Again Capital, thinks that might result in the kingdom holding back exports into the U.S. in July.

He told CNBC, "I think their next plan of attack is to drop exports to the U.S. so they can manufacture a drop in the Energy Information Administration report; it will make it look like inventories are really coming down," adding that of the 8 million bpd) imported into the U.S. last week, Saudi Arabia probably supplied about 1 million bpd.

Indeed, if the Saudis, which have a large refinery on the U.S. Gulf Coast, take that measure, it would show up immediately in the EIA's import data and inventories as a bullish signal.

Kilduff is not the only expert this week to question the integrity of the Saudis with regards to the cutbacks: Olivier Jakob, strategist at Petromatrix, downplayed the widely heralded accounts of the kingdom continuing to cut beyond its target under the OPEC agreement: "They're making a lot of headlines about reducing supplies, but that's also right in their seasonal pattern of lowering exports in July, August, because of domestic needs."


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