The oil market is languishing and the trend is downward judging by the movement of benchmark crude prices. The price of Opec’s basket of crude oils posted $53.79 a barrel on July 20, down from $64.96 on May 6.
Brent crude oil prices posted $56.67 a barrel, down from $69.63 during the same period.
The reasons are many. Most importantly, concerns about more than 2 million barrels a day (mbd) of oversupply is what really matters. Opec production is now 31.7 mbd according to IEA and 31.4 mbd according to Opec, which is well above the ceiling of 30 mbd decided by the organization.
Production in Saudi Arabia, Iraq and UAE rose last month.
Other factors weighing on oil prices are the Greek crisis and its possible impact on growth in the Eurozone. Even the EU bailout deal may not be met with a popular acceptance for its severe austerity measures.
The relative slowdown in China may not only impact oil demand but also the filling of China’s strategic petroleum reserves.
The strength in the exchange rate of the dollar is not helping as it makes oil more expensive to all consumers other than the US. Oil stocks are now very high and rising which keeps consumers in a comfortable position.
Yet the market is confused by the available forecasts. While IEA is saying ‘Global oil demand growth is forecast to slow to 1.2 mbd in 2016, from an average 1.4 mbd this year’, Opec’s ‘Oil Market Report’ has not only revised upward demand for this year by 0.1 mbd but says “In 2016, world oil demand growth is forecast to pick up, reaching 1.34mbd.”
They are, however, closer with respect to the 2016 call, with Opec’s at 30.3 mbd and 30.1 mbd, according to IEA and Opec projections. It is perhaps the first time in a long time that the forecast is at a higher level, which may be attributed to a slowdown in US production.
Despite the majority of analysts predicting a softer market, CNBC reported that some banks are predicting a rebound in oil prices.
“JP Morgan expects Brent prices to hit $65 a barrel in the third quarter, and $67 in the fourth quarter of this year,” it reported, driven by demand in the holiday period followed by the cold season.
“Barclays analysts expect Brent to trade around $61 a barrel in the third quarter and $66 in the last quarter of the year,” it added.
Not even the decline in Saudi crude exports in May moved the market upward as it turned out to be a false signal when considering the rise in the kingdom’s exports from new refineries and its rising level of direct crude burn in the summer.
I have left the impact of the deal between P5+1 and Iran to the end of what might impact prices. I have discussed this at length in a previous column and mentioned that the market remains aware of the risk, though currently remains unimpressed as there will not be a flood of Iranian oil hitting the market this year or even in the next.
If IAEA reports by December that Iran has implemented all the requirement of the agreement, then Iranian oil will start flowing and estimates range between 0.5-1.0 mbd by the end of 2016.
The deal has been given a boost with the unanimous vote in the UN Security Council to endorse it and making it binding after 90 days, which still gives a chance to dissenting powers in the US and Iran to try and undo the deal.
In the US, Republicans and some Democrats are bent on scuttling the deal and they are more upset by the UN vote which seems to circumvent their own. But even if they succeed in the long process, it is not clear where that will leave the US with respect to its European allies, Russia and China.
Will the US Congress accept the country’s isolation and open the door again for Iran to purse its nuclear activities?
In Iran, the Revolutionary Guards’ commander Mohammad Ali Jafari denounced the deal and said “We will never accept it” as reported by Tasnim News Agency.
But we have to wait and see if Iran’s National Security Council will approve the deal.
Russia and Opec Secretary-General Abdullah Al Badri will discuss oil markets and the Iran situation in Moscow on July 30.
Russian energy minister Alexander Novak said that “the prices will be determined by the production costs of shale oil”, which implies that Russia is far from discussing any production cut as agreed with Saudi Arabia earlier and much to the displeasure of Iran.
With all what is going on, it is right to say that the oil market is passing into interesting times.