Investing.com – There appears to be a calm in the oil market before the storm and the events that follow might be as disruptive to crude prices as those that pushed the market up prior to Tropical Storm Barry.
Crude prices opened the New York session steady on Monday despite China posting its slowest quarterly economic growth since 1992. Prices did decline by noon but nowhere commensurate to last week’s 5% rally. Some think the market’s relative calm is deceptive as Barry attracted premium pricing before the weekend but turned out to be a non-event, and significant downward adjustment is required now.
U.S. was down 62 cents, or 1%, at $59.59 per barrel by 1:30 PM ET (17:30 GMT).
London-traded , the benchmark for oil outside of the U.S., slid 33 cents, or 0.5%, to $66.39.
China posted annual GDP growth of 6.2% in the second quarter, its slowest in 27 years, but in line with expectations. Some analysts suggested that Beijing may step up support measures that could be positive for oil, but the room for aggressive stimulus is limited by fears of adding to already high debt levels and structural risks.
It is also difficult to predict the impact of Tropical Storm Barry on oil prices. A key factor in last week’s rally, Barry reached hurricane status as it made landfall in Louisiana on Saturday but quickly weakened back to a tropical storm and was a tropical depression by Monday.
Apart from the precautionary shutdown of 1.4 million barrels per day of output, some crude was still awaiting refinement due to the idling of some local refineries. Gulf of Mexico oil fields provide about 17% of U.S. oil supply.
The reduced refining activity could raise stockpile balances on the Gulf Coast in the short term, making it hard to match the previous week’s drawdown of 9.5 million barrels across the country.
In that case, crude prices could fundamentally see a net loss and at least stay flat in the near term, to balance out some of last week’s 5% rally in WTI crude and 4% in Brent.
“My sense is that the market is not a believer” in the oil rally, said Scott Shelton, energy futures broker at ICAP (LON:) in Durham, N.C.
“I believe that the market continues to be concerned with demand and no doubt that the Q2 Chinese GDP is a red flag. Transitional markets are always a hard call as the market continually gets bought on a ‘FOMO’ (Fear of Missing Out), but the optics are negative for WTI at least for the near term.”
Phil Flynn, energy analyst and typically an oil bull, appeared to concur with Shelton’s thinking.
“Tropical Storm Barry could have been a lot worse,” Flynn said.
“Yet it might not be just the passing of Barry that could ease upward pressure on oil prices, but also the possibility that geopolitical storms with Iran may start to see the skies clear.”
After a year of exchanging trades and nearly coming to blows with the United States, Iranian President Hasan Rouhani expressed willingness at the weekend to finally come to the table for a new round of nuclear talks with the United States.
But Rouhani also demanded that the Trump administration first rolls back all sanctions imposed on the Islamic Republic that will allow Tehran to sell its oil without restrictions.
Washington has already responded no to the Iranian proposal.
U.S. Secretary of State Mike Pompeo dismissed Iran’s idea as “the same offer that he offered to John F. Kerry and Barack Obama.”
“President Trump will obviously make the final decision. But this is a path that the previous administration had gone down and it led to the (Iran nuclear deal) which this administration, President Trump and I both believe was a disaster,” Pompeo said.
Britain was also reported at the weekend to be ready to facilitate the release of a seized Iranian tanker if Iran could provide guarantees the vessel would not breach European sanctions on oil shipments to Syria as European nations called for new talks to ease tensions in the Persian Gulf.