Oil steady on tropical storm, geopolitical tensions
Oil market oversupplied in 2019 on US production
Oil prices edged higher on Friday and were on track for a weekly gain as US oil producers in the Gulf of Mexico cut more than half their output because of a tropical storm and as tensions continued to simmer in the Middle East. However, an International Energy Agency (IEA) forecast for a global oil surplus capped the gains. The agency on Friday predicted that surging US oil output will outpace sluggish global demand and lead to a large stocks build around the world in the next nine months.
OPEC also predicted on Thursday the return of a surplus next year despite an OPEC-led pact to restrain supplies. Brent crude futures were up $0.36 at $66.88 a barrel by 1315 GMT after hitting a session high of $67.29. US West Texas Intermediate (WTI) crude futures were up $0.06 at $60.26 after touching a high of $60.74. Brent prices have climbed 4.1% this week while WTI has gained 4.9%. Both registered declines last week.
It is fair to say that OPEC’s best-laid plans to rebalance the oil market have, so far this year, fallen flat, said Stephen Brennock, analyst at PVM Oil Associates.
The oil cartel has led from the front in curbing supply since the start of 2019, yet it has failed to quash stubborn oversupply.
US crude oil inventories have declined for four weeks and prices were also supported by oil companies in the Gulf of Mexico cutting production because of tropical storm Barry.
Companies cut more than 1 million barrels per day (bpd) of output 53% of the region’s production as the storm headed for possible landfall on the Louisiana coast on Saturday.
The storm was forecast to become a category one hurricane with winds of at least 74 mph (119 kmh). Warren Patterson, ING’s Head of Commodity Strategy, said that concerns will soon grow around the amount of refining capacity at risk.
Disruption to refining operations as a result of the storm would likely prove supportive for product cracks, and given the growing importance of the United States as a refined product exporter, this strength would likely be felt in other regional markets as well, he said. The market remained on edge as tensions intensified between Iran and the West. Tehran on Friday said that Britain was playing a dangerous game after last week’s seizure of an Iranian tanker on suspicion it was breaking European sanctions by taking oil to Syria.
As things stands, market players are clearly not envisaging a supply shock in the region. Only time will tell whether this turns out to be a case of wishful thinking but one thing is clear that geopolitical risks are here to stay, said Stephen Brennock, analyst at PVM Oil Associates.
Meanwhile, surging US oil output will outpace sluggish global demand and lead to a large stock build around the world in the next nine months, the International Energy Agency (IEA) said on Friday. The forecasts appear to predict the need for producer club OPEC and its allies to reduce production to balance the market despite extending their existing pact, forecasting a fall in demand for OPEC crude to only 28 million barrels per day (bpd) in early 2020.
Market tightness is not an issue for the time being and any rebalancing seems to have moved further into the future, the IEA said in its monthly report. Clearly, this presents a major challenge to those who have taken on the task of market management, it added, referring to the Organization of the Petroleum Exporting Countries and producer allies such as Russia.
The demand for OPEC crude oil in early 2020 could fall to only 28 million bpd, it added, with non-OPEC expansion in 2020 rising by 2.1 million bpd a full 2 million bpd of which is expected to come from the United States. At current OPEC output levels of 30 million bpd, the IEA predicted that global oil stocks could rise by 136 million barrels by the end of the first quarter of 2020. Maintaining its forecasts for oil demand for the rest of 2019 and 2020, the Paris-based agency cited expected improvement in US-China trade relations and US economic expansion as encouraging but flagged tailwinds elsewhere.
There are indications of deteriorating trade and manufacturing activity. Recent data show that global manufacturing output in 2Q19 fell for the first time since late 2012 and new orders have declined at a fast pace, it said. The IEA said that markets were concerned by escalating tension between Iran and the West over oil tankers leaving the Gulf but that incidents in the region’s shipping lanes have been overshadowed by supply concerns. The oil price impact has been minimal with no real security of supply premium, the IEA said. For now, maritime operations in the region are close to normal and markets remain calm. Tightened US sanctions on Iranian crude drove down Tehran’s June exports by 450,000 bpd to 530,000 bpd, near three-decade lows.