U.S. West Texas Intermediate and international-benchmark crude oil futures are trading lower early Monday after a U.S. government official said the Trump administration was considering granting waivers to its sanctions against Iran’s crude exports which are scheduled to begin on November 4. Additionally, a report that Saudi Arabia stands ready to replace any potential shortfall from Iran also weighed on prices.
For weeks, crude oil has been underpinned and driven higher by U.S. sanctions set to target Iran’s crude oil exports during the first week in November, and the Trump administration has been leaning on governments and global companies to cut their imports to zero. Today’s news and the price action indicates the bullish floor is beginning to crumble.
The first piece of bearish news weighing on prices today is the report that a U.S. government official said on Friday that the country could consider exemptions for nations that have already shown efforts to reduce their imports of Iranian oil.
The second potentially bearish factor is rumors that the Saudis are prepared to replace any potential shortfall from Iran. Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore, said there was also “chatter that Saudi Arabia has replaced all of Iran’s lost oil”.
In other news, the U.S. oil drilling rig count fell for a third consecutive week, as rising costs and pipeline bottlenecks have hindered new drilling since June.
According to energy services firm Baker Hughes, drillers cut two oil rigs in the week to October 5, bringing the total count down to 861. It further added that this is the longest streak of weekly cuts since October last year.
The early price action indicates that the weaker longs believe this weekend’s news enough to reduce positions and book a little profit. Due to a U.S. holiday, this is likely to keep the pressure on the markets through today’s session.
I believe investor sentiment, while still bullish, is shifting more toward value. This likely means we won’t see any serious buying this week unless the price is right.
At the start of the week, the concern is about supply. This is understandable given the change in the bullish narrative. However, the bulls are also keeping an eye on the potential spare capacity constraints and the slowdown in U.S. drilling. This means that any supply disruption can send prices soaring again as well as Asia’s strong demand.