WTI Has First Gain of Year; Brent Breaches $30

Brent dipped below $30/bbl in intraday trading Wednesday, a day after WTI had done the same (the first time in over ten years for each benchmark to plumb to such levels). The front-month Brent contract on the ICE settled down about 2 percent to $30.31/bbl; and, WTI’s front-month contract on the NYMEX settled at $30.48/bbl (up less than 1 percent).

Oil prices had fallen during the first seven trading sessions of the year, with bearish sentiment driving momentum. Trading volumes for the front-month contract reached 18,000 contracts Tuesday (more than double Friday’s level), with a record number of shorts in the market. Although the market might be accelerating toward a potential bottom with the preponderance of one-sided bets, it could also be tending toward a short squeeze when positions eventually need to be closed out. When this happens, violent gyrations in the price could ensue.

A strengthening dollar coupled with news from China that included weak economic data and government intervention in the stock market and currency have roiled oil markets since the beginning of the year. The backdrop to these two driving factors is the ever-present global glut in oil, where supply is currently outstripping demand by as much as 1.5 to 3 million barrels per day, according to some estimates.

With no apparent signs of strengthening demand, and only further indicators of future global supply growth, the outlook for oil prices is leading most market watchers to ratchet down estimates for oil prices in 2016 and 2017. The Energy Information Agency (EIA) released its closely-watched Short Term Energy Outlook Tuesday and gave new, lower average price estimates for both Brent and WTI in 2016 at $40/bbl and $38/bbl, respectively. In 2017, the EIA estimates Brent to average $50/bbl and WTI at $47/bbl.

Upon the release of the EIA’s Weekly Petroleum Status Report Wednesday morning, oil prices traded flat. The report showed an exceptionally large build to U.S. product inventories for the week ending Jan. 8, with an increase of 8.4 million barrels for gasoline; and a rise of 6.1 million barrels for distillate (which includes diesel and heating oil). U.S. crude inventories rose .2 million barrels, and Cushing, OK inventories (where the WTI contract is settled) also increased by 100,000 barrels. The EIA data continued to support the notion that U.S. production will remain strong despite the price rout, with 9.2 million barrels per day reported for the week ending Jan. 8.

As refiners enter into a seasonal maintenance period, demand for crude is anticipated to wane while warm weather has dampened heating oil consumption. The effect of lower pump prices lifted U.S. gasoline consumption, but the trend is not expected to continue into 2016. For the four-week period ending Jan. 8, total refined production consumption in the United States was down by 3.1 percent versus the same period last year, according to the EIA.

While markets are eager to reach a bottom soon, gauging the volume and effect of Iranian crude re-entering world markets upon the lifting of sanctions is one reason why that point has not been reached. Ten U.S. Navy sailors were detained Tuesday by Iran’s Revolutionary Guard after crossing into the country’s waters. Following a U.S. apology, the Iranian authorities released the sailors – helping clear a diplomatic hurdle that could have potentially impeded the process of lifting sanctions, which is scheduled to commence next week.