Oversupply fears hit oil prices last Wednesday, after the U.S. Energy Information Administration reported that U.S. crude-oil stockpiles rose last week for the first time in nine weeks. Followed by data that showed a sharp ramp up in U.S. production in April to levels not seen in decades.
On Friday, Baker Hughes reported the number of rigs drilling for oil in U.S. fields rose by 12, bringing the total to 640. Oil experts had expected the rig count to bottom out soon and then rise by about 100 rigs later in the year.
Plenty of Downside Risks
- Greece leaving the Euro zone could strengthen the U.S. dollar which is traditionally negative for oil prices. Another catalyst for a stronger U.S. dollar will come when the Fed’s hikes interest rates, expected to begin later this year or early next year.
- Iran’s nuclear deal with global powers will bring more of its crude to an oversupplied market and will put downward pressure on oil prices. If a deal gets done soon, Iran currently has millions of barrels of crude oil in floating storage that could be on the market fairly quickly. It may take some time but Iran also has the potential to add another 700,000 barrels a day to the world oil supply by the middle of next year.
- Stock markets have been worried about slower Chinese growth, they just don’t believe the GDP numbers coming out of China. The Chinese stock market is down 30% recently which has the potential to hurt the broader population of Chinese investors, a sign that China could be heading into a recession.
- A lot of hedge fund money is looking to pile into the short-side of the oil trade. Crude oil is teetering toward a technical bear market, having lost almost 20 percent of its value from a high above $62 just a month ago. More downside momentum could push it to test the six-year low of $42.03 set in mid-March based on technical indicators.
- The Alberta government has increased corporate income taxes, doubled the carbon emission tax and is currently reviewing their royalty fees. Three additional reasons to avoid investing in Canadian oil produces.
With the market already oversupplied with 1.5 million to 2 million barrels a day, any sign of movement toward a nuclear deal will be bearish for oil markets, Matt Smith, director of commodity research at Clipper Data Smith said. Iran could release as much as 40 million barrels of oil currently sitting in floating storage into the market.
Put all these risks together, I think that getting anywhere near the $70 mark is a long shot. The question is, does the oil market hold at $50 or do we go back to $40? At some point, investors that have long positions could start bailing, adding further pressure on oil prices. The one year chart of the oil ETF is getting near its 52 week low of $71.70