OMINOUS clouds are gathering on the crude horizon. With prices touching three-month lows and July prices nearly 15 percent lower than June, bears appeared much in control. Technically too, after dropping 20 percent since beginning June, crude markets have entered a bear phase. This is now official. The trend was evident for the last few days. Both crude benchmarks, WTI and Brent, hit new multi-month lows last Wednesday after US government data revealed a surprise rise in crude and gasoline inventories. The build added to an already huge global refined product glut, just as slowing economic growth dented the demand outlook. Following the developments, the euphoria that was gripping the markets for the last few months, taking the US crude's contract prices to a 2016 intraday high of $51.67, appears to be finally disappearing. The oil-price rally that began in February, when prices rose from $26 per barrel to $51 by early June is now over. In the intervening period, markets have turned a full cycle. The sentiments that were too pessimistic at the beginning of the year, extremely bullish in June are now back again to pessimism. The glut has struck back! And it seems to be getting bigger, with weekly US government data last Wednesday showing a surprise inventory increase in the world's biggest oil consumer at a time when summer driving demand should deplete stockpiles. Expectations are dampened. Prices are set for their biggest monthly loss in a year amid a growing recognition the surplus will take a time to clear, many are now beginning to insist. Varga at brokerage PVM believes that record high stocks and oversupply could drive crude prices down into the mid $30 per barrel area before a significant rally. Morgan Stanley says headwinds are growing for the oil market with oversupply being the order of the day as production disruptions, such as in Canada and Nigeria, have largely been overcome. In a note to clients on 24 July, Morgan analysts' revised down their oil demand expectations. "We are cutting our forecast for global refinery demand for crude oil (runs) to 625,000 barrels per day from 800,000 bpd on expected run cuts, with downside risk to these low numbers. And this impacts the price trajectory too. "We also recently lowered our third quarter average Brent price forecast from $50 per barrel to $45, and see more downside risk." And with output getting back to the normal, crude could again slump toward $30 a barrel, Morgan Stanley cautioned. "The tables are turning on the bulls, who were prematurely constructive on oil prices on the basis, the re-balancing of the oil market was a done deal," said Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London. "It's probably going to take a little longer than they expected." The stockpiles of crude and refined products that built up in industrialized nations during the years of oversupply remain formidable. Current OECD inventories stand at 3.1 billion barrels and untold millions of barrels are in places like China and Russia that do not report storage volumes fully. Traders struggling to sell cargoes are hoarding the most barrels on board tankers at sea since the end of the 2008-2009 financial crisis, EIA estimates indicate. Interestingly, this latest challenge to the market is "a shift in the surplus from crude to products." The issue is not only with crude but with products too. Another build to gasoline stocks and a large build at Cushing has only added to the bearish tone. This is more striking, especially since North America is in a summer driving season. Traditionally the stockpile of gasoline goes down and not up during the season. Yet the reverse is happening. Refiners churned out gasoline earlier in the year to take advantage of cheap crude, and stockpiles of the motor fuel are now at the highest for the time of year in at least 20 years, EIA data show. "There's lots of crude and refined products around," said David Fransen, Geneva-based head of Vitol SA, the biggest independent oil trader. "Demand growth has faltered a bit." And in the meantime, US domestic production seems steadying too. The drop in US domestic output has come to a halt, the EIA data shows. The weekly count of active oil rigs published every Friday by Baker Hughes Inc. has recorded its longest run of increases since last August. 66 land rigs and 47 tight oil horizontal rigs have been added to the count by last week since early June. Last week, prices were crashing but 18 rigs were added, the biggest increase in almost 2 years. OPEC's oil output is also approaching its highest in recent history, a Reuters survey found on Friday. 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, the survey based on shipping data and information from industry sources said. As per the report, Iraq is pumping more and Nigeria has managed to export additional crude despite militant attacks on oil installations. And if the talks about reopening some of the Libyan oil facilities succeed, OPEC's production could rise even further, most now agree. Markets could not be oblivious to all this. They are taking note of all this. And are reacting. Oil prices thus appear slipping - at the moment. Yet, the chatter about the markets rebalancing ultimately, and soon enough, continues. It has not died down. Banks from Citigroup Inc. to Barclays Plc and Societe Generale SA are confident the overall re-balancing of the market remains on track, despite the current price retreat, and that markets will recover by the end of the year. "I would call it a bump on the road towards a looming rebalancing," a Barclays analyst in London was quoted as saying. The recovery will take prices up to $50 a barrel by the end of the year, according to Barclays and Commerzbank. In the meantime, however, sentiment has soured so much that further losses to $40 are inevitable, Commerzbank's Weinberg said. "The oversupply will diminish," he, however, asserted. Before stabilizing, markets are in for a bumpy ride. It could still go down, one has to concede. Yet the medium term oil outlook is not too negative and pessimistic - at this moment. An interesting picture may emerge, a few months down the road.
