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The Most Bullish Oil Report This Year

Bull

Despite the huge uncertainties related to the two massive hurricanes that hit the U.S., the global oil market looks tighter than it has in a long time, according to a new report from the International Energy Agency.

Global oil supply fell in August for the first time in four months, the IEA said, a result of a dip in OPEC’s oil production, combined with refinery maintenance and sizable outages from Hurricane Harvey. World oil supply fell by 720,000 barrels per day (bpd) in August compared to July, a significant decline that will aid in the market’s progress towards rebalancing.

Multiple outages contributed to the decline in global output. Hurricane Harvey resulted in U.S. oil production falling by 200,000 bpd in August—outages that occurred mostly in the Eagle Ford shale and offshore in the Gulf of Mexico. But OPEC also saw its collective output fall by 210,000 bpd in August, mainly from disruptions in Libya.

The supply outages will go a long way toward adding some momentum to the rebalancing effort, even if some of them are only transitory.

Another notable issue, the IEA said, was that U.S. oil supply is quite a bit lower at this point than it expected, and not just because of Harvey. The agency singled out the fact that U.S. oil production actually declined in June from a month earlier, an unexpected development. That meant that the Harvey disruptions resulted in output declines from a lower-than-anticipated base. Related: How Will Venezuela Deal With A PDVSA Default?

The demand side of the equation also looked bullish. The IEA revised up its forecast for oil demand growth this year, upping it to 1.6 million barrels per day (mb/d) from its July estimate of just 1.5 mb/d. The second quarter stood out, with quarterly growth of 2.3 mb/d year-on-year—the highest in two years. The Paris-based energy agency said that demand in OECD countries (i.e., rich industrialized countries that tend to have weak demand growth rates) “continues to be stronger than expected, particularly in Europe and the U.S.”

The stronger forecast is notable not just because it puts oil demand growth at its hottest in a long time, but also because the IEA essentially shrugged off any lingering effects from the storms in the U.S., concluding that the “impact on global markets is likely to be relatively short-lived.”

The IEA did point out that the U.S. Gulf Coast is more strategically important to the global oil market than ever. Texas and Louisiana exports some 4 mb/d of refined products along with 0.8 mb/d of crude oil. Crude oil exports are also set to rise further, so in a global context, the U.S. Gulf Coast has emerged as one of the most vital energy hubs, meaning that “in some respects, it can be compared to the Strait of Hormuz in that normal operations are too important to fail,” the IEA cautioned.

But the market appears to be handling the outages without too much trouble, certainly aided by the fact that inventories have been “comfortable.” That doesn’t mean that there aren’t significant atypical market conditions in Texas, Florida and the U.S. as a whole (there certainly are), but only that at the global level, the oil market won’t change all that much.

As for inventories, OECD stocks held steady in July from a month earlier, which is actually a bullish sign given that they typically rise at this point in the year. Crucially, refined products stocks in the OECD are only 35 million barrels above the five-year average. “Depending on the pace of recovery for the U.S. refining industry post-Harvey, very soon OECD product stocks could fall to, or even below, the five-year level.”

This point is significant. The oil market has been drowning in too much supply for three years, but at least for products (gasoline, diesel), inventories are getting close to average levels. OPEC’s goal is to bring crude oil inventories back to average levels, not just products. But if product inventories get back to normal, refineries will have to work harder to ensure that there is enough gasoline and diesel to meet consumer demand. That ultimately means a greater drawdown in crude stocks could be forthcoming. In other words, this is a sign that the market is rebalancing.

To be sure, at this point, few expect huge price spikes. In fact, some analysts warned everyone not to get too excited, not least because oil supply is still expected to grow by quite a bit through next year. Related: Plastics Won’t Save Oil

“The IEA sees strong demand growth and declining OECD inventories at the moment. But it also sees an increasing challenge for OPEC in 2018,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement. “Thus if OPEC wants to see further reductions in OECD inventories in 2018 they need to maintain cuts all through 2018 in order to push OECD inventories yet lower. If not, they will instead rise again.”

There are a lot of question marks about 2018, but in many ways, the IEA just published one of its more bullish reports in quite a while. Supply fell, demand is at its strongest in two years, and inventories are drawing down at a good pace.

By Nick Cunningham of Oilprice.com

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  • Jeffrey J. Brown on September 14 2017 said:
    An interesting article in today's WSJ, about the Crown Prince's continuing efforts to consolidate his power:

    WSJ: Saudi Arabia Clamps Down as Crown Prince Consolidates Power
    Prince Mohammed is expected to accede to the throne held by his father, King Salman

    And an excerpt from the 2012 book "On Saudi Arabia" follows that I always cite:

    http://www.amazon.com/On-Saudi-Arabia-Religion-Lines/dp/0307473287

    "What scares many royals and most ordinary Saudis is that the succession, which historically has passed from brother to brother, soon will have to jump to a new generation of princes. That could mean that only one branch of this family of some seven thousand princes will have power, a prescription for potential conflict as thirty-four of the thirty-five surviving lines of the founder’s family could find themselves disenfranchised."

    And my comment:

    Using a estimation methodology that was too optimistic for post-1995 CNE (Cumulative Net Exports) for the Six Country Case History*, I estimated that post-2005 Saudi CNE would be about 60 Gb, with 31 Gb having been shipped from 2006 to 2016 inclusive.

    If we divide estimated post-2005 Saudi CNE at the end of 2005 by 2005 Saudi population and estimated remaining post-2005 CNE at the end of 2016 by 2016 population, estimated post-2005 Saudi CNE at the end of 2005 were 2,400 BO per capita and remaining estimated post-2005 CNE at the end of 2016 were 900 BO per capita.

    For the sake of argument, if we assume that the Saudis sell their remaining CNE for about $75 per barrel, they would generate about $70,000 per capita from selling their remaining estimated total volume of CNE.

    *Major net oil exporters, excluding China, the hit or approached zero net oil exports from 1980 to 2010
  • rjsigmund on September 18 2017 said:
    actually, if anyone would check the demand revisions in OPEC's report, you'd see there was a shortfall of around 820,000 barrels per day of global oil production in August...also note that global production for July was concurrently revised lower, to 97.16 million barrels per day, so that means there was also a deficit of 410,000 barrels per day in July ...in addition, the 400,000 barrels per day upward revision to second quarter demand reduces the June surplus to 1,080,000 barrels per day, and turns what was previously figured to be a 270,000 barrels per day surplus in May into a 130,000 barrel per day deficit....April's revised figures now show a 440,000 barrel per day deficit,, and prior to that the global oil surplus during March would be revised to 630,000 barrels per day, and average surpluses for January and February would be reduced to around 850,000 barrels per day....

    OPEC uses an average of estimates from six "secondary sources", namely the International Energy Agency (IEA), the oil-pricing agencies Platts and Argus, ?the U.S. Energy Information Administration (EIA), the oil consultancy Cambridge Energy Research Associates (CERA) and the industry newsletter Petroleum Intelligence Weekly, as an impartial adjudicator

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