Wednesday, 19 September, 2018

A downturn in demand forecasts sends oil prices lower

Oil hits high OPEC compliance reaches record 172%
Orlando Vargas | 17 May, 2018, 17:57

The IEA said there was now the risk of a potential double supply shortfall represented by Iran and Venezuela, where the pace of oil output decline is accelerating due to an economic crisis, that "could present a major challenge for producers to fend off sharp price rises and fill the gap, not just in terms of the number of barrels but also in terms of oil quality". The theory of storable commodities predicts that such conditions will lead to higher flat prices and lower calendar spreads.

Oil prices slipped on Wednesday, as a strengthening dollar overshadowed a U.S. crude inventory report that showed domestic crude stocks falling more than expected.

Brent crude futures LCOc1 reached an intraday high of $80.18.

OPEC production cuts and the potential of wide-reaching U.S. sanctions on Iran did little to prevent oil prices dipping further on Wednesday.

How much oil will Iran sanctions take off the market?

Without a doubt the oil glut that once sank prices below $40 per barrel is now gone. Energy economist Phil Verleger says "we could be in store for the greatest market price disruption ever" and sees Brent possibly reaching $120 this summer.

Critically, the US market is moving into its peak demand period, and this time of the year, inventories typically fall. China's crude oil imports in the first quarter increased by 7 percent on the year to around 9.09 million bpd-a rise of nearly 595,000 bpd on average compared to Q1 2017, according to Reuters calculations.

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At the same time, China's domestic crude oil production has been languishing near June 2011 lows in the first quarter this year, prompting higher imports to meet growing demand.

On a country-specific basis, about 86% of total non-OPEC supply growth previous year came from the United States, followed by Canada, Kazakhstan and Brazil. OPEC's sometimes-unruly members have even over-delivered on their promised cuts: as of last month, they were trimming their production by 63% more than they had promised, according to the World Bank.

"Looking into the next 18 months, we expect global oil supply and demand balances to tighten, driven by the ongoing collapse in Venezuelan output", the report said.

"Globally, a total of 269 projects are anticipated to be approved in 2018, with 30 projects now in final investment decisions - outside of tight oil - of which 54% will be onshore and 46% offshore, with Brazil showing the largest growth potential from new field start-ups", according to OPEC.

The IEA, established in the 1970s to oversee the energy security of consuming nations, said it welcomed a statement by Saudi Arabia acknowledging the need to mitigate any shortage that might arise. As Reuters noted, based on conversations with OPEC sources: "OPEC is in no hurry to decide whether to pump more oil to make up for an expected drop in exports from Iran".

Total will not continue the SP11 (South Pars 11) project and will have to unwind all related operations before 4 November 2018, unless Total is granted a specific project waiver by United States authorities with the support of the French and European authorities.

It's interesting that, despite all the noise, Iranian oil is still selling at a premium.

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