Oil recovers from weekly lows, sentiment remains bearish

Finding a stable oil price floor remained hard to come by as trading volumes picked up on Tuesday after the Easter break.

Prior to the festive period, both Brent and WTI front month futures contract shed around $3 per barrel last Thursday, only to recover lost ground in early Asian trading on Tuesday. However, no sooner had that transpired; both benchmarks took another tumble downwards as European trading gained traction.

At 13:08 BST, the Brent front month futures contract was trading down 0.69% or 40 cents at $57.72 per barrel while the WTI was trading down 1.19% or 62 cents at $51.52 barrel. Pricing sentiment is being largely dictated by oversupply, with negligible support to the upside from the geopolitics of the day.

When a provisional agreement was reached during the Iranian nuclear talks last week, the prospect of additional crude oil flooding the market raised its spectre sending oil prices lower. Subsequently, this turned out to be hyperbole as several market commentators including Goldman Sachs and Barclays brushed aside the prospect of additional Iranian crude making a tangible impact to the global crude oil pool.

Meanwhile, Iran sent its envoys to China in a bid to entice it largest oil market client to buy more. Whatever the wider dynamic might be, according to industry estimates a rise in Iran’s exports is likely to be a trickle by June, and not a flood.

Furthermore, it would take at least until 2016 for Iran’s exports to reach pre-sanctions levels, though it is said the Islamic republic does have 40m barrels for export at the ready. Meanwhile, the oil supply glut shows no sign of abating as neither the US production level nor rig counts have fallen enough to support the oil price.

According to Baker-Hughes, the number of operational rigs in the US came in at 1028 rigs on 2 April, down 790 from the same date 12 months ago. Goldman Sachs said the drop was nowhere near enough to support prices and there was little upside for its $40 per barrel forecast over the next three months, as US inventories would likely rise again by October, pressuring prices into 2016.

The American Petroleum Institute will release its weekly oil inventories data on Tuesday at 2130 BST, while the US Energy Information Administration will publish its data on Wednesday at 1530 BST.

While oversupply continues to hound the market, Barclays said demand-side influences remain lukewarm at best. Placing faith in China’s ability to support oil prices would be premature at this stage, according to Chi Zhang, analyst at Barclays.

“China’s oil demand faces significant headwinds, and we think hopes that the country will provide strong support to the global oil market are premature. Chinese oil demand has shown fairly healthy growth so far this year. For the first two months of 2015, imports averaged 554,000 barrels per day, up 5.4% year-on-year.

“However, this apparent robust demand reflects a low base year effect rather than actual strong growth, and the headwinds remain strong as the underlying economy continues to battle the structural challenge.

Overall, Barclays said Chinese investment, property construction, and heavy industrial production are decelerating and in correction mode due to widespread overcapacity. None of this bodes well in terms of supporting the oil price, it added.