The oil market sentiment cannot be trusted. A few weeks ago, the market was fixated on a supply crunch from the upcoming oil sanctions on Iran and the doubtful level of spare capacity in other oil producing countries.
We are certainly heading into interesting times in the oil market. The declining level of prices and the renewed oil stocks build-up in the consuming countries may force Opec and associate producers to reconsider their options in reintroducing control over oil production to maintain stability and a price level accepted by all.
Although the fear factor did not reach panic levels and no refiner was reported to be paying a premium to get crude supplies, prices rose sharply such that Brent reached $86.29 (Dh316.94) a barrel on October 3.
There was however a view among some observers that the market had rallied too far and too fast and a correction was coming.
Spare capacity
This view was strengthened by producers’ assurances about an increase in supply. The press release of the meeting in Algiers on September 23 of the Joint Opec-non Opec Monitoring Committee (JMMC) said “the Committee urged countries with spare capacity to work with customers to meet their demand during the remaining months of 2018,” which was interpreted as an indirect declaration that the group would increase production as necessary.
1.5 mbpd
Iran exports cut from previous 2.5 million bpdApart from Opec producers, non-Opec supply growth is over 2 million bpd, especially from the US, which would outstrip global demand in 2019, as in 2018, by 0.58 million bpd and leaving little room for Opec to maneouvre.
This is coupled with the fear that the growth in crude demand is at risk of falling due to the ongoing and increasingly vicious trade war between the US and some of its major trading partners.
However, the average of the latest projections is still solid for a demand growth of 1.53 million bpd in 2018 and 1.46 million bpd in 2019, much better than one would expect under the above circumstances plus the dollar appreciation.
The writing was on the wall and oil prices could not stay long at the level they reached in early October. A downward path emerged such that, as I write, Brent is at $72.59 a barrel. Inside a month, the price lost $13.49 a barrel, or a decline of almost 16 per cent.
Adding to the pressure on prices, the US suddenly announced that it would grant sanction waivers to eight countries that are consumers of Iranian oil. Japan, South Korea, Turkey and India are on that list. US Secretary of State Mike Pompeo said the waivers are for few weeks only and to allow countries to adjust, and that the ultimate aim of the US is still for zero Iranian oil exports. This gives more time to other producers with dormant production capacity to bring up an increase.
Therefore, at this point in time investors are less concerned about Iran sanctions and leaving this worry for some other time.
More to come
While Russia is pumping oil at a “post-Soviet high” and US production topped 11 million bpd, a Reuters’ survey of Opec production shows the group more than made up for any decline in Iranian shipments in October and there is more to come.
Current Iranian oil exports are reported to have fallen from 2.5 million bpd in May to around 1.5 million bpd in September and October.
Oil and other commodities were also affected by the “broader sell-off of equities” in world markets. The stock markets seem to be well correlated with crude oil futures, which also rose in early October before falling sharply.
One observer said, “Both the equity and crude markets are bedevilled by a slowdown in global economic growth, rising US interest rates and worries about a prolonged trade dispute between the US and China.”
We are certainly heading into interesting times in the oil market. The declining level of prices and the renewed oil stocks build-up in the consuming countries may force Opec and associate producers to reconsider their options in reintroducing control over oil production to maintain stability and a price level accepted by all.
