Oil prices seesawed at the start of the week before jumping close to multi-year highs on geopolitical concerns, with Brent hitting $70 and WTI at $65. However, geopolitical pressure is only able to influence oil prices to such a degree because the market is fundamentally getting tighter.
Ongoing declines in Venezuela and concerns about heightened tension between the U.S. and Iran have significantly raised the risk premium for oil, even as some short-term factors recently pushed up prices.
The weekly EIA report was a bit mixed. U.S. oil production jumped again by 26,000 bpd in the week ending on March 23, putting output at 10.433 million barrels per day (mb/d), yet another record high. Still, the report wasn’t exactly bearish. Although crude stocks rose, they increased by a modest 1.6 million barrels, and much of that is largely the result of a big jump in imports. More glaringly, gasoline stocks fell sharply by 3.5 million barrels.
In other words, U.S. production is indeed soaring, but it doesn’t appear to be swamping the market, at least as of now. A variety of analysts have argued that oil demand is so strong that the market will continue to tighten, even after considering the explosive growth of U.S. shale. “This year will be the eighth year of continuous growth since the Great Financial Crisis; and the seventh consecutive year of annual growth of more than 1 million b/d,” Wood Mackenzie said in a note. “Our latest forecast suggests that demand will grow by 1.7 million b/d in 2018, the fifth-highest this century.”
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In fact, some of the recent weakness in oil prices lately can be chalked up to fears of a trade war, which could upset economic growth projections. “The biggest risk to oil demand’s winning growth streak is a trade war undermining the global economy,” Wood Mackenzie said. However, the uptick in oil prices at the end of this past week, some analysts say, are at least in part a result of those trade fears subsiding. “Worries about demand being affected by a possible trade war kind of receded,” Gene McGillian manager of market research at Tradition Energy, told Reuters.
At the same time, some attribution for the oil price increase belongs to a rebound in global financial stocks after a recent selloff. “The equities market is rallying and that’s lending support to oil,” Philip Streible, senior market strategist at RJO Futures, told Reuters. The flat dollar also lent some support to crude.
With trade war concerns on the wane, and global equities on the rise, oil prices rebounded. While these short-term factors no doubt played a role in pushing up crude benchmarks, they are occurring against a backdrop of a tighter oil market. The surplus of OECD inventories is now below 50 million barrels, whereas it was above 300 million barrels a year ago.
Indeed, the IEA sees the oil market tipping into a supply deficit as soon as this quarter, and inventory drawdowns will pick up pace in the second half of the year.
“The voluntary production cuts are only playing one part in this,” Commerzbank said in a note. “The involuntary production outages in Venezuela are weighing more heavily, as they mean that OPEC is reducing its output by considerably more than originally intended.”
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As long as OPEC keeps the current production limits in place, the oil market will continue to tighten, even after taking into account U.S. shale growth. And OPEC has even signaled that it is considering extending the cuts for another six months, pushing the expiration date to mid-2019. If they follow through on that, there is a pretty decent chance that there is a lot more room on the upside for oil prices.
Still, there are a handful of uncertainties that would completely upend any reasonable oil forecast. On the bearish side, if OPEC somehow abandons its cuts, begins a phase out sooner than expected, revised the deal to account for sharp declines in Venezuela, or members simply started cheating, then oil prices could slide significantly.
But, arguably, there are more upside risks. The most dangerous is the likely return of sanctions on Iran from the U.S., which could curtail a significant chunk of supply. Worse, the Trump administration could head down a dangerous road that ends in war. Meanwhile, Venezuela’s oil production continues to fall off a cliff.
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In short, because U.S. shale growth is already baked into the current oil market projections, the risk to oil prices is probably skewed more towards the upside due to the variety of geopolitical ticking time bombs.
By Nick Cunningham, Oilprice.com
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Actually, quite the contrary...just take for instance last Thursday's (March 29th) oil rig count from Baker Hughes--a decline of 7 for the U.S. (which is typically bullish for prices). And as I type this on the night of April 1st, there is a rally in the oil markets. Prices will continue through tomorrow (when the U.S. markets are open) on Thursday's news, despite the fact that prices are already soaring.
Another example is with jawboning on behalf of OPEC default leader, Saudi Arabia. They say they *might* extend output cuts into 2019 and the markets have already surged $5/bbl on this news. If the rest of OPEC agrees at their next meeting, prices will continue to go up, even though prices have already gone up on the rumor. In addition, if continued output cuts in 2019 do affect weekly inventory reports (API & EIA) showing draws, the market goes up yet again.
So, when is the market ever in favor of "bearish news"? Yes, there are down days but between OPEC & NOPEC (Russia), every time the market lowers towards the nearest $10 mark (e.g., $40, $50, $60, etc.) when it was recently higher, there is jawboning and U.S. hedge funds just pour in to fill their demands--and quick.
The market has already factored an ongoing decline in Venezuela’s oil production and continued rising tension between Iran on the one hand and Saudi Arabia and the United States on the other.
However, two bullish factors in the market will continue not only to put a floor under oil prices but also to push them up further: Strong global oil demand and the probability of a continued OPEC/non-OPEC production cut agreement beyond 2019 in one form or another.
On the downside is a potential trade war between the United States and China. I am of the opinion that the imposition of tariffs by President Trump on China is the first shots in a potential petro-yuan/petrodollar confrontation that could escalate out of hand into a damaging trade war between the United States and China.
However, the United States and China will eventually realize that rather than go into a trade war and potentially into a wider conflict over the petro-yuan, they could decide that the global oil market estimated at $14 is big enough to accommodate both the petrodollar and the petro-yuan leaving it up to the exporters of oil to determine which currency they want to use. This is far better than damaging the global economy and themselves by a trade war.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
With every producer making money, and most making healthy margins, while a lot of the future production is hedged, and speculators holding over 1.5 billion barrels, the geopolitical risk and weak USD maybe the only things keeping the price above $50.
At the same time the Arabs are losing market share . . . . . how long before they start defending their shrinking turf?
Its great news for the U.S. shale industry which is ramping up production and exceeding everybody's expectations. It will be fun to see what happens.