A period of relative uncertainty for oil market
Let me start by what Saudi Arabia’s Energy Minister Khalid Al Falih recently said: “The markets are adequately supplied. I don’t know of any refiner in the world who is looking for oil and is not able to get it.”
We have not heard of any refiner who is offering a premium to the prevailing prices out of scarcity or panic. So why are prices soaring behind expectations and even rise further?
The approaching oil sanctions on Iran are definitely a major concern to be considered by oil consumers and refiners. But refiners have had sufficient time to adjust to the possibilities and still have about a month to go. So far, analysts are not in agreement about the volumetric impact, and the range is so wide at between 0.5-2.5 million barrels per day (million bpd).
The position of major consumers of Iranian oil is still not clear and some are seeking waivers from the US. It is known that certain buyers have stopped lifting Iranian crude and others have reduced their offtake. Iran has already resorted to storing unsold oil on tankers.
But all this is just an indicator and we have to wait until November to see the real impact. It remains to be seen whether Russia and China would allow President Trump to reach his goal easily.
The average of the latest projections by Opec (Organisation of the Petroleum Exporting Countries), the International Energy Agency and the US Energy Information Agency is for a demand growth of 1.53 million bpd in 2018 and 1.46 million bpd in 2019, with world demand reaching 100.9 million bpd.
non-Opec supply growth is over 2 million bpd and the average indicates this would outstrip global demand in 2019, as in 2018, by 0.58 million bpd.
This leaves little room for Opec to manoeuvre, as forecasts suggest the organisation may have to reduce production or keep where it is at to maintain a balance in the market. The Washington-based Rapidan consultancy expects a supply surplus of more than 1 million bpd next year due to “aggressive US shale supply response” contrary to London-based Energy Aspects, which is forecasting a “shortfall of 0.3 million bpd with demand curtailed by the impact of trade tariffs”.
In July, Opec and its associate producers participating in the Declaration of Cooperation indirectly decided to increase production by bringing compliance with their production cuts down to 100 per cent, from much higher levels in previous months.
The meeting in Algiers on September 23 of the Joint Opec-non Opec Monitoring Committee (JMMC) expressed satisfaction with the performance of the group and declared the trend of falling oil stocks has been reversed. But the most important thing in the subsequent press release is that “the Committee urged countries with spare capacity to work with customers to meet their demand during the remaining months of 2018.”
This is an indirect declaration that the group would increase production as necessary, but it would not get wet before the rain. It is a responsible position and not in any way a response to obnoxious tweets.
Opec alone has increased production beyond Iran’s output and there is more to come to cool the oil market. Prices have risen in the futures market driven either by speculators, who intend to make a killing if supply shortages emerge, or by refiners who are hedging against the possibility of even higher prices.
Brent crude prices, which was more than $86 (Dh316) a barrel few days ago, has fallen to about $84. The view that oil could go up to $100 a barrel is not shared by all analysts and some believe the current price environment is temporary. And that prices may fall back to $70-$80 by the end of the year.
Perhaps, there is now a feeling that the market rallied too far and too fast and a correction is possible.
There is no point in adding to the debate of whether Opec — and especially Saudi Arabia — have the surplus capacity to meet near term eventualities. There are as many doubters and believers and only time will tell. The sure thing is that all the spare capacity cannot be brought on stream as quickly as Trump wishes, no matter his tweets and threats.