The oil market is well-balanced and well-supplied.
This was one of the key messages in the speech that OPEC’s Secretary General Mohammad Barkindo delivered at the Oil & Money Conference in London this week.
The oil market isn’t necessarily all in on OPEC’s ‘well-supplied’ narrative—the perception among market participants has been for weeks that the market is short on oil and will continue to tighten even more when U.S. sanctions on Iran snap back in three weeks’ time and Venezuela’s unstoppable production decline continues.
Despite assurances from oil experts and officials that there isn’t any shortage of supply, the ‘fear factor’—as Vitol’s chairman Ian Taylor put it—has largely, until today, overshadowed fundamentals and is making the oil market more emotional than usual.
OPEC’s chief attempted to calm market fears, assuring delegates at the London conference this week that there is plenty of oil to go around, that Russia and Saudi Arabia are adding supply as promised in June “to maintain the supply and demand balance,” and that OPEC’s largest producer Saudi Arabia “has not turned down a single customer.”
Barkindo’s speech coincided with the publication of the cartel’s Monthly Oil Market Report, which showed that Saudi Arabia added 108,000 bpd of production last month, lifting output to 10.512 million bpd, and that Russia pumped a post-Soviet record high of 11.54 million bpd, up by 150,000 bpd from August. OPEC’s increased production and the help from Russia offset a 150,000-bpd production loss in Iran and another plunge in Venezuela, which is now pumping less than 1.2 million bpd, as per OPEC secondary sources. Related: Oil Markets Take A Bearish Turn
At the conference in London, Barkindo also revealed that one of the key oil customers and demand growth drivers—India—had sent a letter to OPEC complaining about the high oil prices it is now paying for oil.
OPEC is scheduled to hold talks with India on October 17, as it wants to ease consumer fears, the cartel’s chief said.
India has expressed “discomfort” with the high oil prices, Barkindo said, noting that “As one of our major consuming countries, of which we have an official energy dialogue, it was also a concern for us getting this feedback from India.”
And it should be a concern for OPEC, because India—also struggling with a massive local currency depreciation which makes oil even more expensive for it—is a key demand growth driver, and this ‘discomfort’ may be a sign that demand destruction is coming with Brent Crude prices above $80 a barrel.
“I’m confident, hearing from our largest producers, that they are ready, willing, and capable to ensure that this market remains well supplied,” OPEC’s head stressed, as quoted by Platts.
“The market has been reacting to perceptions of a supply shortage, it is not really as such. The balance may be fragile as a result of non-fundamental factors, but I remain confident that we will overcome.”
Not only is the market currently well-supplied, projections point to a possible rebuild of stocks in 2019, Barkindo said.
Despite assurances that there isn’t any shortage of oil in the world and that Saudi Arabia and Russia would be keeping the supply-demand balance, OPEC’s head admitted that current market forces are definitely not the fundamentals, and are out of reach of the cartel’s control. Related: Barclays: $70 More Likely Than $100
“Nonetheless, we do recognize that there are many non-fundamental factors influencing the market that are beyond the oil industry’s control, such as geopolitics, growing trade disputes, natural disasters and other developments. They can have compound effects and are a major source of uncertainties,” Barkindo said in his keynote speech.
OPEC’s report and the chief’s speech at the conference—along with the EIA’s report that US crude stocks saw a sizeable increase—did manage to assuage fears and contribute to a price decline in the last couple of days.
Despite these assurances from OPEC, it’s likely that the oil market will continue to be ruled by emotions rather than fundamentals for at least another month, until participants see how much Iranian oil will really be choked off by the sanctions, how much the Saudis and Russians are able (and willing) to offset, how low Venezuelan production would drop, or how Libya and/or Nigeria will keep their ever-fragile production recovery.
There may be no shortage of oil whatsoever, but the perception of a supply squeeze may still be the dominant narrative on the market over the next few weeks and months.
By Tsvetana Paraskova for Oilprice.com
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However, what is keeping the global oil market uneasy is the US Federal bank’s hiking of US interest rates, the pressure by President Trump on OPEC and particularly on Saudi Arabia to lift oil production significantly, the repetitive speculation about the impact of US sanctions on Iran and his escalating trade war against China.
The US Federal Bank’s hiking of US interest rates is causing currency turmoil in emerging economies. They are suffering from seeing their currencies depreciate against the US dollar thus exacerbating oil and energy prices in their national currencies and depressing demand.
The pressure by President Trump on OPEC to raise its production is also raising doubts about OPEC’s and Saudi Arabia’s spare production capacities.
The repetitive talk about the adverse impact of US sanctions on Iranian oil exports is creating uncertainty in the market though market realities support my view that the sanctions will fail miserably and the Iran will not lose a single barrel of its oil exports.
Moreover, the escalating trade war between the US and China is destabilizing the global economy. However, there is a glimmer of hope that the meeting in November between President Trump and Chinese President Xi Jingping could lead to breakthrough ending the trade war between their countries.
The first chink in the US armour is starting to appear with the US Treasury concluding that China has not been manipulating its currency to benefit from trade with the United States. This is one of two accusations President Trump used when he imposed tariffs on Chinese exports. The other is the huge trade surplus China enjoys with the US.
It is, therefore, no coincidence that the Trump/Jingping meeting comes at the time US sanctions against Iran go into effect. If no breakthrough is reached then, the trade war between them could be expected to escalate further. China could nullify US sanctions altogether by importing the total Iranian oil exports amounting to 2.125 mbd and paying for them in petro-yuan. Moreover, the petro-yuan has made the US sanctions useless and has provided a way by which Iran could bypass the petrodollar and the sanctions altogether.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London