There has been a raft of bad news for oil. In a market which already has a supply glut, more supplies from Iran would add to the existing chaos.
On this news, Brent crude fell more than 5 per cent on Friday, and analysts feel more pain is still left before any respite.
Iran, the fifth-biggest Opec producer, will increase the production by 100,000 barrels a day, in a month and by 400,000 in six months, according to Bloomberg. Meanwhile, the country’s oil minister has pledged to boost output by half a million barrels a day within weeks of the end of sanctions, by the same amount again in six months.
“The return of Iranian barrels should be in every oil analyst’s books for 2016. That said, should the embargo crumble already next week, this would be earlier than expected and could well add to the bearish sentiment,” Norbert Rücker, Head of Commodity Research, Bank Julius Baer & Co Ltd told Gulf News over email.
Brent crude has shed more than 20 per cent since the start of the year, the worst two-week decline since the 2008 financial crisis.
And the sentiment is excessively bearish.
“The excessive short positions as well as the pronounced steepness of the futures curve indicate in our view how bearish the sentiment has become. Excessive short positions warrant short covering risks, i.e. sharp upmoves,” Rücker said.
Brent has reverted to a discount all the way out to August 2017 and some of this can be explained by the additional pressure being applied to international prices from the additional barrels from Iran.
Narrower spreads
However, WTI-Brent spread has narrowed from the high of more than $10 (Dh36.70) per barrel.
“The spread between Brent and WTI is set to remain narrower than in the past for the time being. The rolling over of US production means that oil imports become relatively more important. Also, storage is among the cheapest in the US. WTI prices should reflect the incentive for both going forward,” Rücker said.
Amid all the price action now, Brent may see a gradual recovery later in 2016.
“Nonetheless, much of the current move is very much based on speculations which are raised by analysts calls who are looking at the crude price to drop below $20. However, as for me, I think now is the time if you want to have a position in oil [with long term view]. It may be immensely fruitful if you want to start buying at this level and trigger the rest of the position with more weakness in the oil price action,” said Naeem Aslam, chief market analyst with AVA Trade.
Even Osama Al Ashri, member of British organisation, Society of Technical analyst agreed with this point of view.
He expects a recovery in prices to $47/52 in the third quarter.
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