Oil prices appear to be trapped within a relatively narrow range, squeezed between competing forces on both the upside and downside.
There is no shortage of news, but WTI is stuck between $50 and $60, and Brent is stuck between $60 and $70. Obviously, nothing is ever static in the oil market, and the one truism about oil is that volatility can and will return. But for now, oil is range-bound, supported by supply outages, OPEC+ cuts and geopolitical unrest on the one hand, but capped by weak demand and a looming return of surplus on the other.
"Oil markets have been becalmed within tight ranges amid falling volatility," Standard Chartered wrote in a note. "While front-month Brent has settled higher on seven of the past eight trading days, the pace of the ascent has been glacial."
Opposing forces are keeping crude prices in place. The threat to the Strait of Hormuz is old news by now, and the markets are not overly concerned about a possible outage. Iran and the UK, each with their own tanker, are working to de-escalate tensions. But they are at an impasse, and the parallel U.S. and European initiatives to patrol the Persian Gulf could yet reignite tensions, and that threat has helped to keep prices higher than they otherwise might be.
At the same time, Iran's oil exports continue to fall. According to Reuters, Iranian shipments may have plunged as low as 100,000 bpd in July - another massive decline - down from 400,000 bpd in June. The precise figure is up for debate, especially since some tankers can turn off their transponders to avoid detection. But it's safe to say that exports are in decline. "We can't be sure that all of this capacity has been sold in July," Sara Vakhshouri, an analyst at SVB Energy International, told Reuters. "Also, it's important to note that some of the deliveries mostly to China are based on IOU contracts and are not new sales." Iran shipped as much as 2.5 mb/d prior to the return of sanctions in early 2018.
Meanwhile, some recent data points from the U.S. could also put some upward pressure on crude. The EIA reported a slight decrease in U.S. oil production in May, the latest month for which data is available. Production declined by 26,000 bpd month-on-month, dragged down by a 78,000-bpd dip in offshore output. The return of idled production the Gulf of Mexico will bring that number back up in ensuing data releases, but nevertheless, the production gain of just 16,000 bpd in Texas is notably smaller than the monthly increases in the past two years. Related: What's Stopping Oil From Breaking Out?
The rig count continues to fall, which points to deceleration, even if rigs are an imperfect metric for tracking production. Still, output gains are slowing in tandem with the dip. Oklahoma also lost 12,000 bpd for the month and the rig count continues to fall there. The "steady flow of capital out of Oklahoma has continued," Standard Chartered wrote in its report.
The lower-than-expected figures from U.S. shale call into question the heady growth forecasts. While the U.S. shale sector is suffering from financial stress, the unfolding slowdown could result in some bullish pressure on crude oil.
"Supply fundamentals still remain supportive of oil prices, and are tightening given the effectiveness of U.S. sanctions that have reduced Iran's crude oil exports to a trickle," Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA, told Bloomberg. But for "oil to move higher, the market is going to need a positive economic catalyst." Related: Will We Really See An Oil Glut In 2020?
The flip side of this story is weak demand, economic uncertainty and the expected supply surplus in 2020. Some analysts, including the IEA, have predicted a supply wave in 2020 that will force OPEC+ to back out even more production or else face a price crash. An economic recession, should it occur, would likely result in a total bust.
In short, there are multiple forces on both the upside and downside, keeping oil range-bound. "[W]hile headline risks have been plentiful, they're price impacts are mixed and support both bullish and bearish theses, leaving plenty of buyers and sellers on either side of $55/bbl," Rory Johnston, commodity economist at Scotiabank, wrote in a note.
But some of the worst economic fears have receded in the past few weeks, especially given the change of direction from several top central banks around the world, including the U.S. Federal Reserve. That has given a slight edge to the bulls. "Concerns about demand have moved into the background, at least temporarily, thanks to better than expected economic data in the US and the Fed's imminent rate cut," Commerzbank said in a note on Wednesday.
WTI is edging up to the high-$50s and Brent to $65. But something would need to dramatically change to force prices out of their current range.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More
Comments
However, things could change quickly as well. The change is not going to come from an early settlement of the trade war. This will not happen until shortly before the presidential elections in 2020 so that President Trump could ensure getting another term in the White House.
The one factor that can change almost immediately is a sudden escalation of tensions in the Gulf leading to a flare up of hostilities between Iran and the United States.
Whilst war is neither an option for Iran nor for the United States, still a war could happen by accident rather than by design.
Iran made it clear that there will be no risk to shipping in the Strait of Hormuz unless it is attacked or its crude oil exports were prevented from passing through the Strait. In such an eventuality, it will block or mine the Strait of Hormuz so as to disrupt other Gulf countries’ oil exports.
A war with Iran could cost the global economy far more than the invasion of Iraq. My calculations are that such a war could cost the global economy $13.137 trillion and leave the economies of the Gulf countries in tatters.
The claims in the article quoting Reuters that Iranian crude oil exports were down to 300,000 barrels a day (b/d) in July are hype and without any substantiation.
According to the authoritative 2019 OPEC Annual Statistical Bulletin, Iran exported on average 1.85 million barrels a day (mbd) in 2018 despite US sanctions. Moreover, the Bulk of Iranian crude is being exported to countries which have never accepted US sanctions and have continued to buy Iranian crude, namely China, India, Turkey and even Russia (food-for goods). Furthermore, Iran is managing to sell more of its crude in spot markets as well as to countries which don’t want to be identified for fear of US reprisals. There you have it.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London