Slowing oil demand growth and a persistent global glut will cap oil prices and keep them from rising too much, barring serious escalations in geopolitical tensions, Fatih Birol, the executive director of the International Energy Agency (IEA), said on Friday.
“Prices are determined by the markets...If we see the market today we see that the demand is slowing down considerably,” Reuters quoted Birol as saying during an energy conference in India today.
According to the head of the Paris-based agency, substantial amounts of oil from the U.S. are flooding the market, and oil output also grows in Iraq, Brazil, and Libya.
This increase in supply, however, has now created a global glut, the IEA said in its latest Oil Market Report. Oil supply outstripped demand by 900,000 bpd in the first half of this year, the IEA said last week, warning that the oil market rebalancing has slowed down.
“This surplus adds to the huge stock builds seen in the second half of 2018 when oil production surged just as demand growth started to falter. Clearly, market tightness is not an issue for the time being and any re-balancing seems to have moved further into the future,” the IEA said.
In its July report, the IEA said that its outlook for oil demand growth in 2019 is little changed from the previous report and still stands at 1.2 million bpd.
But Birol told Reuters in an exclusive interview earlier this week that the agency is cutting its 2019 oil demand growth projection to 1.1 million bpd in view of slowing global economy.
“If the global economy performs even poorer than we assume, then we may even look at our numbers once again in the next months to come,” Birol told Reuters.
Early on Friday, oil prices were rallying after the United States Navy shot down an Iranian drone in the Strait of Hormuz on Thursday. USS Boxer took defensive action against an Iranian drone that had approached the ship too close despite numerous warnings to stand down, U.S. President Donald Trump said. The drone was threatening the safety of the ship and the ship’s crew, and was immediately destroyed, President Trump added.
Iran denied the incident, saying that all its drones over the Strait of Hormuz are accounted for.
At 06:21 a.m. EDT on Friday, WTI Crude was up 1.37 percent at $56.18, and Brent Crude had jumped 1.74 percent at $63.01.
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By Tsvetana Paraskova for Oilprice.com
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The claim by the head of the IEA that substantial amounts of oil from the US are flooding the market is typical hype. How could the US flood the global oil market when its total exports in 2018 amounted to a mere 2.0 million barrels a day (mbd) and its net crude oil imports amounted to 7.76 mbd according to the authoritative 2019 OPEC Annual Statistical Bulletin. Only three countries in the world could flood the market with oil: Russia, Saudi Arabia and Iraq probably by 2021/22.
If oil prices declined in the last three days it is not because global oil supply has outstripped demand by 900,000 barrels a day (b/d). This is manageable. The market faced a much bigger glut estimated at 2.0-2.5 mbd between 2014 and 2016. The recent decline in prices is because of a growing feeling in the global oil market that tension between Iran and the United States is starting to de-escalate.
Moreover, the trade war between the United States and China has been having a strong bearish influence on the global oil market creating uncertainty and depressing global oil demand and therefore oil prices.
And yet, the fundamentals of the global economy are still robust with the global oil demand projected to add 1.2 mbd this year and China’s oil imports soaring and projected to hit 11 mbd also this year. Furthermore, the Chinese economy is growing by a very healthy 6.2% in 2019. This is spectacular for the world’s largest economy based on purchasing power parity (PPP) when compared with a 2%-2.5% for the United States and a 1.5%-2% for the EU.
The end of the trade war is nigh because President Trump has no alternative but to end it as it is hurting the US economy far more than China’s. This is because China’s economy is 28% larger than the United States’ and far more integrated in the global trade system than America’s thanks to China’s Belt & Road Initiative. That is why China’s economy can take more punishment than America’s.
I expect oil prices to rebound shortly surging to the $70s.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London