Oversupply meets rising demand in crude market

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 US 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 US 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,a futures brokerage, said by phone last week. “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% from $107.26 in June 2014 to $43.46 in March before rebounding about 40% into the current trading range. The US benchmark grade lost 21to $56.72 a barrel in electronic trading on the New York Mercantile Exchange at 11:49am Singapore time on Friday.
Volume topped 800,000 contracts a day in the first four months of this year. It fell to 636,128 last month, down 40% from February’s record high of 1.07mn, according to exchange data compiled by Bloomberg. Open interest fell to 1.612mn on June 22, the lowest since January.
The CBOE Crude Oil Volatility Index, which measures oil price fluctuations using options of the US Oil Fund, closed at 29.01 on June 26, the lowest level since October. The US fund, the biggest exchanged-traded fund that follows oil, holds front-month WTI futures.
Investors pulled $1.02bn 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 Organisation of Petroleum Exporting Countries’ pledge to keep pumping more crude and rising US output despite the unprecedented drop in drilling rigs.
Opec produced 32.1mn barrels a day in June, above its 30mn quota for a 13th month, according to data compiled by Bloomberg. US output was 9.6mn 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 US production,” Harry Tchilinguirian, BNP Paribas’ London-based head of commodity markets strategy, said by phone.
US gasoline demand increased to 9.54mn 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 eurozone 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 the referendum yesterday on austerity, deepening Greece’s financial misery.
Iran has urged Opec to make way for it to pump 4mn barrels a day, back to the level of about 3.8mn before Western sanctions intensified. The country produced 2.85mn in June, according to data compiled by Bloomberg.
Some investors expected oil to move higher as the US rig count decreased. Rob Thummel, a managing director at Tortoise Capital Advisors in Leawood, Kansas, which oversees $16.9bn, said oil may move above $65 in the second half and into a $65-to-$80 range eventually as US production slows.
Rigs drilling for oil rose 12 this week to 640, according to Baker Hughes. 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 US production and a resolution to an Iran deal,” said Paul Crovo, a Philadelphia-based oil analyst at PNC Capital Advisors.