As winter keeps its grip on the northern hemisphere it is the oil bulls, not the bears, who have gone into hibernation. The price rally that greeted the new year has fizzled out as renewed concerns about demand growth outweigh the tightening of oil supply through Opec cuts and US sanctions.
Saudi Arabia had already started to deliver on its promised output reductions in December and went beyond what was pledged in January. US production growth has stalled — for now — and President Donald Trump’s sanctions on oil flows from a second Opec producer (Venezuela joins Iran on the naughty step) will cut supplies even further.
The flow of Opec crude to the US fell to the lowest in five years in January, according to data from the cargo-tracking and intelligence company Kpler. Bloomberg’s own tanker tracking shows the flow of crude from the Arabian Gulf to the US last month was 36 per cent lower than in December and almost 60 per cent lower than in August.
Those flows matter, not because the Americans are Opec’s biggest customer — they aren’t — but because the US market is still the most transparent. Official weekly data on the country’s oil production, consumption, refining, stockpiles and trade flows is watched keenly by traders and policymakers. Those indicators drive sentiment.
That’s why Saudi Arabia decided to focus its output cuts on the US in the middle of 2017 and has done so again now. While the kingdom’s crude shipments were cut by 10 per cent between November and January, flows to the US were slashed by 46 per cent, taking them to the lowest level since Opec and other oil producers began the last round of supply reductions at the start of 2017.
US production growth is also expected to slow significantly in 2019. Output rose by about 1.8 million barrels a day between December 2017 and December 2018, almost three times the increase that was expected at the start of last year. This year, it’s expected to rise by just 520,000 barrels a day.
The slowdown in US output growth might be seen as bullish for crude — so long as you believe the Department of Energy has got its forecast right this time.
And then there’s Venezuela. Sanctions on its oil exports, and on the sale to the country of the diluent needed to let its extra-heavy crude flow through pipelines, have had an instant impact. The country is now diverting some of its own light crude from export markets to mix it with the extra-heavy oil in an attempt to keep producing.
And things are going to get worse for Venezuela’s oil sector. The sanctions will hasten the decline in output and even if there’s a swift transition of power, which looks unlikely, it will be months before production is restored.
Infrastructure is crumbling, the state oil company has lost much of its technical staff, and an interim government will struggle to enact promised changes.
The problem for bulls is that while oil supply has clearly tightened, demand is starting to look weaker again. The European Commission has slashed growth forecasts for the Eurozone’s big economies and warned that Brexit and the slowdown in China threaten to make things even worse. That might start to weigh on oil demand forecasts, which have remained relatively robust.
Last month, the International Energy Agency cited “average prices being below year-ago levels” as the main reason it saw demand growth holding up. We’ll have to wait for its next forecast to see whether it still thinks that’s the case.
Oil prices have been flat for a month, which should be positive for demand, but the weakening economy is negative. And if the oil bulls do emerge from their January slumber, and start pushing up prices, they might just choke off that demand.