Oil trades have not exactly shot the lights out this year. With the bulls getting kicked more times than a pigskin at the Super Bowl in a highly fickle market, bears are once again taking the lead in oil markets.
After a strong start to the year, oil prices have merely been treading water since late April following a perfect storm of unceasing trade tensions, lackluster demand growth and growing US commercial inventories that have dampened the outlook.
The outlook has improved somewhat over the past few weeks after the U.S. and China agreed to an interim trade deal, though niggling uncertainties coupled with ongoing supply worries appear to be capping gains.
Right now, the markets are approaching a key resistance area on the weekly charts with trade news causing volatile price swings.
As the two nations close in on a ‘phase one’ deal, the biggest bargaining chip that will determine whether the 16-month trade spat will ever be fully resolved depends on whether Trump will agree to roll back some tariffs.
As things stand right now, it would be a stretch to say the oil market is nearly out of the woods.
There are some serious risks and overhangs that could still do plenty of damage even in the event that the two nations finally come to a compromise.
#1 US Shale Boom Continues
The one thing that’s giving the oil bear its loudest roar is the ongoing U.S. shale boom.
Ok, there’s been all this talk about the second shale boom circling the drain with the ongoing rig count collapse serving as a smoking gun. But here’s the rub with that idea: A third shale boom appears to be on the cards already. Related: A Bull’s Guide To Oil Markets
Notably, OPEC is decidedly bearish about the future of the market citing US shale. In the cartel’s annual outlook report for 2019, it notes that oil accounts for 35 percent of global energy supply while also adding that OPEC supplies 35 percent of the world’s oil. OPEC says it expects the U.S. shale boom to continue full steam ahead, with our light tight oil accounting for the majority of new global production over the next five years.
It’s the figures that are shocking: OPEC has projected that U.S. tight oil output will balloon by another 5.3 million b/d and take the country’s production to 17.5 million b/d in the period ending 2030. Spread out evenly, that works out to an increase of 482,000 million b/d every year over the next 11 years. While not exactly earth-shattering, it’s still big enough to roil the markets, especially considering the weak demand growth projections for the next few years.
But it’s not just US shale that the bulls have to worry about. The New York Times has warned about a deluge of new supply coming from Canada, Norway, Brazil and Guyana.
#2 Iranian Sanctions Lifted
This is another huge supply overhang that may actually be deadlier than the US shale boom.
As we reported in a previous article, the EU is desperate to strike a new nuclear pact with Iran since it sees it as a key component of both regional and global security.
The Europeans have poured lots of cash into ensuring the nuclear deal stays afloat. They have even put up a safeguard to keep money flowing to Tehran, though it has hardly been very effective. The whole idea is to protect European companies doing business in Iran from Trump’s sanctions, though many remain wary of being shut out of the even more lucrative American market.
Trump’s maximum-pressure strategy has generated even greater regional instability in the Middle East and led to a loss of US credibility in Europe. However, POTUS has expressed optimism about striking a new Iran deal that was first mooted by British Prime Minister Boris Johnson.
A new deal would possibly mean lifting some sanctions and could mean more Iranian oil hitting the markets.
In June, Reuters reported that Iranian oil exports had dropped to just 100,000 b/d; that figure could quickly balloon to 2.5 million b/d if Trump decided to grant Tehran its wish.
Helima Croft of RBC Capital Markets has warned that a return of Iran to the oil markets could create a huge supply overhang and could see WTI prices drop as low as $50 per barrel.
#3 No China Deal
Last week, reports emerged that Washington and Beijing had agreed on an interim trade deal involving a phased rollback of tariffs. A day later, Trump backtracked and declared that he had not agreed to any tariff rollbacks.
It’s this kind of double-speak that makes you question how genuine either sides is at making any sort of comprehensive deal.
Indeed, Wall Street sees gloomy prospects of anything beyond a Phase One deal happening anytime soon, and has warned that something more solid will be required for market sentiment to improve definitively.
According to the Institute of International Finance, the trade war has led to a “synchronised economic slowdown,” including falling imports. A nebulous trade pact just won’t cut it as far as repairing the damage goes.
#4 Weak Global EconomyThe stream of bearish projections by OPEC seems to be eternal.
The 14-member organization now says it expects demand for its oil to be weaker-than-expected, which bodes really badly for a market that’s going to see more of the commodity coming in in a few short years.
OPEC sees oil demand clocking in at a mere 32.8 million barrels per day (mb/d) by 2024, substantially lower than the 35 mb/d it had projected last year.
The long-term outlook is a bit brighter, with OPEC projecting demand growth of 12 mb/d over the next two decades. Related: The Cure For Low Gas Prices Is Low Gas Prices
OPEC has been wrong in the past, and oil bulls can only hope that this is again the case this time around.
It’s not peak oil anymore. It’s peak oil demand.
Even the much-awaiting IPO prospectus for Saudi Aramco is flagging peak oil demand risk within 20 years. Just a short while ago, Saudi Arabia was dismissing any idea of peak oil demand as highly exaggerated.
The Bears Have It Made
Source: WTI Oil Chart by TradingView
Source: Brent Crude Oil Chart by TradingView
Nymex crude oil prices are firmer today and trading around $57/barrel, but there’s a lot raining on that parade.
Not only do we have the U.S.-China trade war, but rising tensions amid protests in Hong Kong are weighing down on this. Hong Kong will absolutely affect a U.S.-China trade deal in one way or another.
And then, overnight, Federal Reserve Vice-Chairman Richard Clarida noted that very low global inflation levels are presenting problems for the world’s major central banks. In other words, it’s hindering their ability to stimulate economic growth.
This comes with another nod to U.S. shale by a U.S. Energy Department official who highlighted that U.S. shale oil production will reach 13 million barrels per day next month.
So, a lot of news expected even later today to further bolster the bearish stance on oil, including more U.S. economic data.
By Alex Kimani For Oilprice.com
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The trade war has widened an already existing glut in the market from a relatively manageable 1.0-1.5 million barrels a day (mbd) before the war to an estimated 4.0-5.0 mbd. This glut has been big enough to nullify the impact of geopolitics on oil prices and also absorb a loss of 5.7 mbd from Saudi oil production. However, the geopolitical influence has enhanced the gold price.
Even a small initial agreement between the two titans to a phased rollback of extra tariffs could stimulate the economic prospects of the global economy and enhance the global demand for oil and therefore prices.
The claim about US shale oil boom is self-delusional and excessive hype based on some faulty and overly-optimistic assumptions. Baker Hughes rig count is a pivotal indicator of the state of US shale oil production. Rig counts don’t lie. They tell the truth as it is on the ground. The fall of rig count in Texas and the fact that Texas is home of the Permian confirm a steep slowdown in US shale oil production and a lot of bankruptcies among US drillers.
The claim by the US Energy Information Administration (EIA) that US current oil production is 12.5 million barrels a day is a simple lie. This figure includes natural gas liquids (NGLs) which come from natural gas wells as well as such gases as ethane, propane, butane and pentanes which may not qualify as crude oil and condensates in its crude oil count. Moreover, there is a difference ranging from 600,000 barrels a day (b/d) and 1 million barrels a day (mbd) between weekly and monthly EIA production figures. Taking both into consideration would reduce actual US shale oil production to under 10 mbd. This calculation destroys the EIA’s and IEA’s claim that the US is the world’s largest crude oil producer.
Therefore, the slowdown in US shale oil production will act as a bullish influence rather than a bearish one for global oil demand and prices.
Sanctions on Iran will never be lifted since Iran will never renegotiate the nuclear deal with the United States because the Iranian leadership doesn’t trust President Trump. Iran could equally afford to wait until it sees the back of President Trump. It will, however, never negotiate with President Trump’s successor either until he accepts Iran’s preconditions, namely lifting the sanctions and restoring the nuclear deal.
Iran is talking from a position of strength. Military and social achievements accomplishments coupled with economic endurance have emboldened Iran in its attitude to negotiations with the United States.
Iran has reached the conclusion that the US is capitulating and will be soon withdrawing from the greater Middle East, starting with the Persian Gulf, Iraq and Syria and leaving the whole region under Iran’s influence.
Sanctions on Iran have so far been bearish since they have so far failed miserably to stop Iran exporting the bulk of its crude oil.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London