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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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This Oil Rally May Be Short-Lived

Broken Oil

It’s been another week of upbeat OPEC reports—from secretary general Mohammed Barkindo’s belief that global oil demand will jump to over 100 million bpd by 2020 to the proud announcement that compliance with the oil production cut deal had hit 120 percent in September—but is the most recent rally sustainable?

These announcements do have an impact on prices, but their effects are often short-lived, especially when facts of life prove them wrong.

For starters, any supply or demand announcement from an organization such as OPEC needs to be taken with not one but two grains of salt. The cartel knows very well that an upbeat message could—and often does—send prices higher. Barkindo, for instance, gave no foundation for his forecast of oil demand growth.

Neither did OPEC’s monitoring committee go into detail about the 120 percent compliance rate. In truth, this record-high compliance rate covered all partners in the deal—OPEC and non-OPEC. However, it doesn’t really mean much if you look at OPEC’s own production numbers for September.

These show that several members were pumping above their November 2016 quotas, notably the UAE, Iran, and Iraq. Saudi Arabia produced about 83,000 fewer barrels per day than what they agreed to, as did a few other OPEC members, though by a lot less. The biggest non-OPEC partner in the deal, Russia, has made no recent announcements about producing less than its 300,000-bpd cut quota.

Related: Aramco CEO Warns Of Imminent Oil Supply Crunch

What’s more, a few days before OPEC patted itself on the back for the super-compliance, IEA’s Fatih Birol estimated the cartel’s member compliance at 86 percent, saying it was a good rate, even though it’s significantly worse than earlier months. Yet traders continue to rush to buy crude whenever OPEC says, “We’re doing great!”

Now some experts are beginning to warn that the rally won’t last, regardless of upbeat messages from sources whose wellbeing depends on high oil prices. And it’s not just the start of refinery maintenance season in the U.S. that will push down prices.

Investment strategist Ivan Martchev from Navellier & Associates, for example, notes that crude oil demand growth in China may fall short of expectations. The Chinese economy, Martchev says, may not be growing at officially reported rates, and any nasty surprise there would weigh on prices. That surprise could come in the form of a credit bubble that’s already burst, Martchev says, but we have yet to hear the bang.

On the positive side, however, he notes the unprecedented warming between Russia and Saudi Arabia, which would be bullish for oil, but in the long term. In the short term, there seems to be too many headwinds for a sustainable rally.

Tom Kloza from the Oil Price Information Service is also not too optimistic on oil prices, but for another reason: rising U.S. exports. According to him, what the country is doing right now is unprecedented. "The highlight you need to watch for the next few months is going to be more record breaking exports of crude oil. Our view is that it's going to soften the price for Brent," he told CNBC. Kloza believes the United States can export up to 15-20 million barrels of crude weekly—an amount that has no historical precedent.

Related: Which Of These 3 Hotspots Will Be The Next Big Thing In Oil?

So, we have unproved demand growth prospects for China, rising U.S. crude oil exports, and a very optimistic OPEC that’s meeting on November 30 in Vienna to decide the future fate of its production cut agreement. Meanwhile, Iraqis and Kurds are rattling sabers and President Trump has threatened a decertification of the Iran nuclear deal.

The events in Kurdistan were a big reason for the latest oil price spike, but this spike was nowhere as high as it would have been in a less oversupplied market. In fact, as Kloza notes, the market may well be biased toward lower prices based on the not-too-strong reaction to either the fight in Iraq or the Iran sanction situation. In other words, though there’s still enthusiasm about the direction of oil prices, it’s a wary one, with the smarter market players apparently applying the “Hope for the best, prepare for the worse” approach.

By Irina Slav for Oilprice.com

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  • Jean Marley on October 24 2017 said:
    Lets face it mon, the days of cheap gasoline to help out the economy are over. Cherish the gift while it lasted. Its gonna get sky high from here mon let me tell you. The fake news pump is no longer working.
  • Patrick Hickey on October 24 2017 said:
    Thank you for a balanced and rationed article. I feel that OPEC has been fluffing the market and it just feels right for a correction
  • Lo Ping on October 25 2017 said:
    "The rally is at the foothills", says 9 out of 10 experts.

    4 out of 5 scientists say, "low oil prices is the #1 contributor to global warming."

    5 out of 6 oil traders will not buy Venezuela oil anymore because it has too much dirt and water.

    9 out of 10 tourists refuse to travel anywhere in the Middle East.

    The list goes on and on...
  • Al on October 25 2017 said:
    Are the experts short again? The shoe may drop anytime now...or not...
  • Disgruntled on October 25 2017 said:
    "Barkindo, for instance, gave no foundation for his forecast of oil demand growth."

    Well, perhaps because for most people, that's a given. If one consults a graph of historical demand growth, excepting the handful of years of abnormally high oil prices, worldwide oil consumption has gone up every single year. My only beef with his comment, or rather most people's interpretation of it, is that we should hit 100 million barrels per day of demand well before 2020. Of course, he did say "over 100 million barrels per day by 2020".

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