Crude oil prices are tumbling as fears about over supply in an uncertain global economy grabs the spotlight. Even reports of ISIS attacking oil and gas facilities in northern Iraq was not enough to overcome the bearish mood that has owned the oil complex post-Brexit. With a rise of 3 in the U.S. oil rig count and record OPEC oil production and a pathetic U.S. GDP number, it is harder to say when the market will get into balance.
The U.S. GDP grew at an annual rate of just 1.2% in the second quarter, making this the weakest expansion since 1949. While oil did get a little support as the Fed fund futures scaled back expectations of an interest rate increase, crude oil is still looking heavy.
In the meantime, reports that Libya will soon be exporting oil and reports that Nigerian production is on the rise, is weighing on market sentiment. The Wall Street Journal reported that Libya’s state-controlled National Oil Co. said it was taking steps to restart exports from three blocked oil ports after the government reached a deal with local guards that had blocked the facilities during a pay dispute. The deal could help revive Libya’s sagging oil exports, which have been curtailed as various factions fight for control of this North African nation.
Reuters reported on Friday that OPEC's July oil output is likely to reach its highest in recent history, as Iraq pumps more and Nigeria manages to export additional crude despite militant attacks on oil installations. OPEC exporter Saudi Arabia has kept output close to a record high, the survey found, as it meets seasonally higher domestic demand and focuses on maintaining market share rather than trimming supply to boost prices. Supply from the Organization of the Petroleum Exporting Countries has risen to 33.41 million barrels per day (bpd) in July from a revised 33.31 million bpd in June, according to the survey based on shipping data and information from industry sources to Reuters.
China Manufacturing data was mixed but generally better than expected. Caixin put its purchasing managers up to 50.6 from June’s 48.6 on a 100-point scale on which numbers above 50 show activity expanding. The China Federation of Logistics and Purchasing, an industry group, said its separate PMI edged down to 49.9 from June’s 50 as reported by the AP.
Oil rigs rose for the fifth week in a row but the pace may be slowing with only 3 rigs added. Of larger concern should be natural gas rigs. Natural gas rigs fell by 2 last week and record heat should allow for a 3 bcf withdrawal from production. We think that we may see the natural gas market pop as the massive storage starts to go away.
If oil recovers it will need help from the dollar. Long term we will feel strongly that we will see the market get in balance by the end of the year. Short term, seasonal weakness is going to make it hard to take a bullish stand. Still use weakness to pick up long term options.