July 22, 2019 / 5:01 AM / 3 months ago

Oil outlook sours as sanctions, global tensions fail to bring out bulls

    By Shadia Nasralla and Devika  Krishna Kumar
    LONDON/NEW YORK, July 22 (Reuters) - Sentiment in the oil
market has shifted dramatically in recent days, with hedge
funds, producers and traders all taking a more bearish tack in
response to what they see as weakness in worldwide demand.
    The oil market has struggled to sustain a rally despite 
supply restrictions that generally would be considered bullish.
U.S. sanctions on Venezuela and Iran have removed more than 1.5
million barrels of daily supply from the market, OPEC extended a
supply-cut deal into 2020 and tensions between the United States
and Iran are rising.   
    Yet, Brent futures         have struggled to sustain a move
above $65 a barrel and slumped about 7 percent last week, while
U.S. futures        have rarely moved above $60 a barrel. 
    "Given all the bullish news we've had, the flat price has
hardly changed," said Janelle Matharoo of InsideOut Advisors, a
commodities trading and risk management consultancy. "Fifteen
years ago, this kind of news would have shifted the price $20,
$30 per barrel."
    Hedge funds and investors have exited bullish bets on the 
realization that demand may be weaker than anticipated while
U.S. production surges. Producers, meanwhile, have rushed to
lock in future prices, betting that this may be their best
chance to protect against a selloff, oil traders and brokers
    Front-month, or current, futures contracts have not had a
massive selloff - but looking at later-dated contracts, the
underlying weakness is apparent. 
    The premium on front-month Brent crude futures compared with
oil to be delivered in half a year LCOc1-LCOc7 has fallen from
a six-year high in May at more than $4 a barrel to less than
$1.50 last week. That is a signal that worries about tight
supply have abated. 
    Even rising tensions in the Strait of Hormuz, where the
United States and others are moving to protect tankers against
Iran, has produced only modest gains. On Friday, news that Iran
had seized a British tanker supported prices - but futures rose
less than 1 percent.             
    The steady rise in U.S. oil output and demand worries from a
protracted Sino-U.S. trade war, however, have weighed on demand
forecasts. The International Energy Agency recently cut its
expectation for global demand through 2019 and 2020 and said it
may cut it again if the global economy - and especially China
-show further weakness, while Saudi Arabian exports fell to a
1-1/2-year low in May.                          
    Traders said there has been "relentless" selling in bullish
Brent call options as far as December 2021 and 2022, a
reflection of growing expectations that demand for oil is
weakening as supply grows.             
    "There's a feeling on the margin that the current price is
potentially unsustainable and the market structure supports
that," said Matharoo.
    Average 2020 Brent oil prices            slipped to the
weakest in a month at $60.28 a barrel last week. Separately,
bullish speculator bets on U.S. crude futures and options on the
NYMEX               are near the lowest level since 2013. 
    The price weakness presents challenges for oil producers,
and many have started to hedge to protect against a damaging
future downturn in prices. 
    With the recent weakness in the market, some consultants are
warning about waiting too long to protect against future market
moves by buying options to sell or buy oil at a certain price in
the future.  
    "We're telling producers it's time to lock in," said Thibaut
Remoundos of London-based hedging consultancy CTC. "We're less
bullish than most of our clients... We believe there is greater
downside risk than is priced in." 

 (Reporting by Shadia Nasrallah in London and Devika Kumar
Krishna in New York; Editing by  David Gaffen and Dan Grebler)
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