The bulls are well and truly back in the oil market, with many analysts and traders predicting $100 oil by Christmas. But upon closer inspection, these claims appear to be driven fear and greed as opposed to fundamentals.
On Wednesday, the EIA reported a huge build in U.S. inventories, 7.9 million bpd, but oil markets barely noticed. In fact, a few minutes after the EIA’s data release on Wednesday, oil prices posted a new high of $85 before breaking $86 later in the day. For oil traders who focus on fundamentals, the response from oil markets will have come across as strange to say the least. In a less bullish market, an increase in U.S. inventories of this magnitude could well have sent prices down by a few dollars – they certainly wouldn’t have soared to new highs. The same rally happened on the back of a report from Reuters which revealed that Russia and Saudi Arabia had “struck a private deal” to increase output. Interestingly, the United States was reportedly aware of said agreement before the Algiers meeting (held on 30th September) took place. An increase of 500,000 bpd was reportedly planned but, due to opposition from other OPEC members, it wasn’t made public.
As if all of this was not enough to quell fears over the impact of Iranian sanctions on global oil supply, Khalid Al-Falih also announced that Saudi Arabia had increased its production to hit 10.7 million bpd in October (only 200,000 bpd shy of its all-time high). It has also been revealed that Saudi Arabia and Kuwait are in talks to restart production in what is known as the Neutral Zone – the disputed oil resources sitting on the border of the two countries. Muhammad Bin Salman is expected to visit Kuwait this Sunday to discuss the issue.
Last but not the least, there is a full-blown trade war taking place between two of the world’s largest economies, the United States and China. Again, the oil market has largely ignored this potential catalyst, but as the trade war escalates global oil demand is sure to suffer. While China hasn’t officially placed a tariff on U.S. oil, refiners and traders appear to be increasingly wary of purchasing oil from the U.S. – suggesting they believe the tariffs may be on the horizon. Related: Why The Oil Price Rally May Soon End
None of this is to say that markets aren’t tightening at the moment, they clearly are. But can current price levels really be justified? The market is yet to see a supply deficit, with every Aramco customer receiving their requested monthly oil shipments without any cuts or problems.
As November 4th - the official start date of U.S. sanctions on Iran - looms, fear in the market is already hitting fever pitch. And this fear appears to be making markets blind to bearish catalysts. Furthermore, if prices continue this upward trend then we are likely to see demand destruction of some sort. A strong dollar, the U.S.-China trade war and rising oil prices can all easily dent demand from Asia’s emerging economies. India has already started to struggle; it had calculated its budget at $65 per barrel. It seems unlikely in the light of these factors that oil markets will hit the much-talked-about $100 mark this year – in fact it may well be time for a correction.
By Osama Rizvi for Oilprice.com
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There is no doubt in my mind that the global oil market fundamentals are robust enough to support a rise of oil prices beyond $85 a barrel this year possibly hitting $100 early next year.
Some investment banks, many analysts and even the Trump administration have been hyping so much about the adverse impact of US sanctions on Iranian oil exports that they have started to believe their hype. This may have generated an unjustified element of fear in the market.
Market realities indicate that US sanctions on Iran are doomed to fail miserably and Iran will not lose a single barrel from its oil exports. One reality looking everyone in the face is that 95% of Iranian oil exports go to China (35%), India (33%), the European Union (20%) and Turkey (7%) and all of them announced that they will not comply with the sanctions. The remaining 5% goes to Japan and South Korea and both said they will apply for a US waiver and they will get it. Another reality is that China can singlehandedly nullify US sanctions altogether by buying the entire Iranian oil exports of 2.2 million barrels of oil a day (mbd) and paying for them in petro-yuan.
And despite claims by the likes of Bloomberg, Goldman Sachs and other investment banks and analysts of different shapes and sizes that India is going to cut its crude oil imports from Iran, the truth will out. Reports from Reuters suggest that India will buy a total of 9 million barrels of oil from Iran in November even after the US sanctions are implemented.
If prices did not react to the announcement by the EIA of a huge build in U.S. inventories of 7.9 mbd, it is because the global oil market doesn’t believe in such announcements. The global oil market is aware that for years the EIA has used announcements of increases in US shale oil production and rises in US crude and gasoline inventories to manipulate oil prices and force them downwards.
The global oil market received with scepticism the announcements that Russia and Saudi Arabia had “struck a private deal” to increase output by an estimated 500,000 barrels a day (b/d) because it is aware that other than the 650,000 b/d that the two countries have already added to the market two months ago, they have no capacity to add more. Saudi Arabia is scraping the bottom of the barrel trying to restart oil production in the Neutral Zone from where it could get some 250,000 b/d but this can’t happen for at least six months if ever.
The escalating trade war between the US and China will hardly impact on global trade and oil demand since the volume of global trade will not be affected, only the destinations.
If China was hindered by rising US tariffs from selling $800-billion worth of goods annually in the US, it can sell them somewhere else as its economy is far more integrated than the US economy in the global trade system supported by its silk and belt road initiative. China’s oil imports which are the driver of global oil demand will therefore continue unabated.
The US may have to replace Chinese imports with more expensive imports from elsewhere. This will lead to rising costs for US customers, higher inflation, widening budget deficit and rising outstanding debts by at least 2.35%. In other words, the US will be the eventual loser in a full trade war with China.
Sooner or later, the Trump administration will be forced to cut its losses by bringing to an end its escalating trade war with China since it could never win.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London