Oil Oversupply Meets Rising Demand in Quietest Market Since 2013

(Bloomberg) -- The sleepiest oil market since 2013 will probably limp through the second half of the year as well.

Crude traded in a $5 range in June, the narrowest in 19 months. Volume was the lowest since December and open interest - - the number of futures contracts outstanding -- was the least since January. New York-traded futures, which have swirled around $60 a barrel for the past two months, will average about $59 in third quarter and $63 in the fourth, according to forecasts of 22 analysts compiled by Bloomberg.

Neither the potential return of Iranian crude to the market nor the long-anticipated decline in U.S. production is stirring a reaction. While gasoline demand has increased faster than projected, keeping the oil glut from growing, record production from OPEC’s biggest members and potential for a quick increase in U.S. shale output have capped a rebound in prices from the biggest drop since 2008.

“The market has found its equilibrium point and I don’t see any reason for us to break out of the range,” Michael Hiley, head of over-the-counter energy trading at New York-based LPS Partners Inc.,a futures brokerage, said by phone Wednesday. “It’s a tug of war between gasoline demand and crude supplies.”

The current conditions contrast with what the market saw a year ago. West Texas Intermediate crude fell almost 60 percent from $107.26 in June 2014 to $43.46 in March before rebounding about 40 percent into the current trading range. The U.S. benchmark grade lost 21 cents to $56.72 a barrel in electronic trading on the New York Mercantile Exchange at 11:49 a.m. Singapore time Friday.

Trading Volume

Volume topped 800,000 contracts a day in the first four months of this year. It fell to 636,128 last month, down 40 percent from February’s record high of 1.07 million, according to exchange data compiled by Bloomberg. Open interest fell to 1.612 million on June 22, the lowest since January.

The CBOE Crude Oil Volatility Index, which measures oil price fluctuations using options of the U.S. Oil Fund, closed at 29.01 on June 26, the lowest level since October. The U.S. fund, the biggest exchanged-traded fund that follows oil, holds front- month WTI futures.

Investors pulled $1.02 billion from the ETF last quarter, the biggest outflow since the three months ended June 2009, according to data compiled by Bloomberg.

After rallying from March’s six-year low, crude’s upside has been capped by the Organization of Petroleum Exporting Countries’ pledge to keep pumping more crude and rising U.S. output despite the unprecedented drop in drilling rigs.

OPEC Production

OPEC produced 32.1 million barrels a day in June, above its 30 million quota for a 13th month, according to data compiled by Bloomberg. U.S. output was 9.6 million barrels a day last week, close to a weekly record, according to the Energy Information Administration.

“We are more likely to continue trading in a range until we see a material shift in U.S. production,” Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy, said by phone.

U.S. gasoline demand increased to 9.54 million barrels a day in the four weeks ended June 26, the highest level since 2007, according to the EIA.

Oil could break the current range and move lower if Greece exits from the euro zone or a nuclear deal with Iran is signed, Seth Kleinman, head of energy strategy at Citigroup, said by phone June 29.

Greek Prime Minister Alexis Tsipras and his creditors sparred heading into a July 5 referendum on austerity, deepening Greece’s financial misery.

Making Room

Iran has urged OPEC to make way for it to pump 4 million barrels a day, back to the level of about 3.8 million before Western sanctions intensified. The country produced 2.85 million in June, according to data compiled by Bloomberg.

Some investors expected oil to move higher as the U.S. rig count decreased. Rob Thummel, a managing director at Tortoise Capital Advisors LLC in Leawood, Kansas, which oversees $16.9 billion, said oil may move above $65 in the second half and into a $65-to-$80 range eventually as U.S. production slows.

Rigs drilling for oil rose 12 this week to 640, according to Baker Hughes Inc. That’s up from the previous week’s 628, the least since August 2010.

“We will remain range bound until we get greater clarity around two factors: a sustained decline in U.S. production and a resolution to an Iran deal,” said Paul Crovo, a Philadelphia- based oil analyst at PNC Capital Advisors.

To contact the reporter on this story: Moming Zhou in New York at mzhou29@bloomberg.net. To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net; Dan Stets at dstets@bloomberg.net Dan Stets


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