For almost 3 months now, oil prices have moved in a very narrow range. However, this month prices fell 15% in a matter of days, breaking that range and stressing the bearish sentiment among commodity investors. Some analysts point out that the decline was caused by a jump in rigs drilling for oil in the US.
The increase in rig count came as a surprise as it was the first gain since December.
However the increase was very small and we doubt this caused prices to decline that sharply.
Why The Plunge?
Another factor to watch is the historic Iranian nuclear agreement with the US and five other world powers. This deal might have risen the bearish sentiment as Iranian oil output is expected to increase. Oil from Iran will take time to return, and will not have a market impact before next year, but given that the global petroleum market has an oversupply of about 2.5 million barrels per day, the mere prospect of new oil doesn’t help market sentiment.
We believe, whatsoever, that the main driver of the sharp decline has been China’s stock market tumble. Base metal prices were the most impacted but commodities fell across the board and not even oil showed any resilience to the effect of China’s sell-off.
What This Means For Metal Buyers
The fact the oil prices broke below their recent price range is just another reason to expect further weakness in commodity markets, which will likely put a lid on industrial metal prices this Fall.