Baku, Azerbaijan, Nov. 3
By Leman Zeynalova – Trend:
The near $10 per barrel drop in Brent crude seen over October is a spillover from the global sell-off in equities and broader risk-off sentiment in the market, according to the report of Fitch Solutions Macro Research (a unit of Fitch Group).
"Sentiment has been damaged by concerns over rising risks to global economic growth, including rising protectionism, global quantitative tapering, rate-hiking in the US, a stronger US dollar and higher oil prices," said the report obtained by Trend.
The company believes that a significant slowdown in global trade and economic growth would undermine demand for oil, particularly when compounded by the rising price of Brent.
However, the physical threat to demand is not immediate, unlike the acute risks on the supply side that are unfolding around Iran, according to Fitch Solutions.
The company analysts believe that from a short-term and technical perspective oil looks vulnerable.
"Downside momentum is building and the front-month contract has broken back below its 50-day moving average. Time spreads have collapsed, with the front-to-second month spread flipping into contango. As of yet, the sell-off does not look overdone. Options pricing signals that buyers are seeking greater downs ide protection, while bullish positioning in Brent has partly reversed over recent weeks. The ratio of long positions to short held by money managers in Brent has fallen to 15.3, down from a peak of 23.4 in late September," said the report.
Bearish market sentiment and general risk aversion could force a retest of support in the low $70 /bbl range, according to the Fitch Solutions forecasts.
"The focus on the broader macro environment is taking focus away from the fundamentals in oil, which remain broadly bullish. Most importantly, market participants seem to have lost sight of November 5 and the re-imposition of nuclear-related sanctions on Iranian oil. Tanker tracking data for the first two weeks of October put crude and condensates exports somewhere in the region of 2 million barrels per day. Under our base case scenario, exports will fall to 1.2 million barrels per day," said the report.
However, this scenario requires that US extend (limited) sanctions waivers, according to the company.
"Given the hardline position of the US and lack of visible progress on waivers negotiations to-date, there are very substantial risks to this view. The market is ill-prepared for the los s of these barrels and is at growing risk of an upwards spike in prices, when supply-side drivers once again take the market's focus ahead of demand," said the report.
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