Global oil supply surplus may soon become a shortage
Published: Apr 21, 2018 10:25 a.m. ET
Energy Aspect’s Parry says $80+ WTI prices possible in late 2019
By
MyraP. Saefong
Markets/commodities reporter
Oil prices have rallied so far this year, as OPEC-led efforts have helped erase a big global surplus, but the market may soon suffer from a new dilemma: a shortage of crude supplies that would support further price gains.
Stockpiles of the commodity among the industrialized nations that make up the Organization for Economic Cooperation and Development (OECD) stood at 2.84 billion barrels at the end of February, only 30 million barrels above the five-year average, according to a monthly report from the International Energy Agency (IEA).
“The global market has tightened considerably in recent months,” says Matthew Parry, head of long-term research at research consultancy Energy Aspects. The Organization of the Petroleum Exporting Countries is “very close to achieving its originally stated aim of bringing OECD stocks back to parity with their five-year average.”
“What we are seeing happening, and will occur much more frequently going forward, is that one-off [supply issues or threats] will start to have a more pronounced impact upon prices,” says Parry.
When OPEC reached an agreement in late 2016 with some major non-OPEC producers, including Russia, to curb production, stocks were at roughly 348 million barrels above the five-year average, he says.
OPEC member Saudi Arabia has led the way, curbing supplies by around 0.7 million barrels a day between the third quarter of 2016 and the first quarter of this year, says Parry. Overall, “much of the adjustment isn’t really a deliberate supply-cutting effort, but geopolitical troubles that forced supplies down,” such as the 0.6 million barrel a day contraction in supplies over this period from Venezuela, which suffers from an economic crisis, or “problems with aging wells naturally depleting, such as those that have impacted Angola and China.”
Still, OPEC wouldn’t have achieved its goal without the recent strength in demand world-wide, says Parry. He views the supply drawdown as “largely a consequence” of stronger-than-expected demand.
For the past couple of months, the IEA has underestimated global demand, with its first-quarter 2018 estimate at 98.1 million barrels a day–which is likely about 0.3 million barrels a day short of true global demand, according to Parry.
Growth in U.S crude production, meanwhile, shouldn’t be seen as “anti-OPEC,” he says, because “supply possibilities change with developments in technology and innovation, and will continue to do so going forward.”
Energy Aspects is “reasonably optimistic” on U.S. supply growth of roughly 1.6 million barrels a day in 2018, but that’s below the U.S. Energy Information Administration’s recent growth estimate of two million barrels a day–and “we see looming infrastructure constraints playing a role in 2018,” says Parry. He would even go so far as to say that the oil market may soon come up short on supplies, as OECD stocks could be over 100 million barrels below their five-year average by year-end.
“Geopolitical tensions have certainly been in the driver’s seat recently as far as price moves, and their influence has gained precedence as the previous stock overhang has been diminished,” says Parry.
The more recent price climb, with West Texas Intermediate crude futures CLM8, -0.40% jumping by 8.6% for the week ended April 13, came as the market grew concerned over a potential response to the alleged chemical attack in Syria that killed civilians earlier this month. U.S. President Donald Trump, in a combined effort with France and the U.K., ordered airstrikes against Syrian leader Bashar al-Assad’s regime on April 13, raising the risk of retaliation from Syrian allies, and major oil producers, Russia and Iran. The U.S. had already issued new sanctions on Russia, in part due to what it referred to as Moscow’s attempt to subvert Western democracies, and the U.S. is due to decide on May 12 whether to extend sanction waivers under the nuclear deal with Iran. While the U.S. strikes on the Assad regime in Syria are “not material by themselves for the oil market, especially as they avoided targeting Russian bases, the risks of an escalation with Iran will not go away,” says Parry.
He wouldn’t be surprised if WTI prices broke through $80 a barrel “toward the latter stages” of next year. The U.S. benchmark settled at $68.40 a barrel Friday—seven cents below Wednesday’s finish at the highest since December 2014. “We envisage further stock draws over the remainder of 2018, potentially bringing stocks down by, on average, 0.5 [million barrels a day]” this year, says Parry.
This report also appears on Barrons.com
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Oil to stay stuck in $60s as Russia hints at end to production curbs
Richard Reed 09:23, 20 April 2018
Splits have started to appear in the agreement between Russia and oil cartel OPEC over production curbs aimed at pushing up the price of crude.
Speaking ahead of Friday’s OPEC meeting in Saudi Arabia, Russia’s Energy Minister Alexander Novak said producers could ease output restrictions before the end of the year, signed in January 2017, is due to end in December.
The deal has seen prices recover from a low of $34 per barrel in 2014 to a current price of around $68 (20 April 2018).
“The agreement lasts until the end of the year. In June, we can discuss, among other issues, a question about reduction of some quotas during this time, if it is expedient from the market’s point of view,” Novak told Russian news agency TASS.
At the Jeddah meeting, OPEC agreed to "continue to think through further means of strengthening cooperation" on production limits. The governing committee also welcomed assurances on this front from Iraq, Kazakhstan, Libya and Venezuela, and expressed its satisfaction with Iraq and Kazakhstan’s expression of support for improving levels of conformity.
Saudi Arabia would be happy to see crude rise to $80 or even $100 a barrel Photo: Shutterstock
Industry sources told Reuters this week that Saudi Arabia would be happy to see crude rise to $80 or even $100 a barrel.
Shale – a thorn in OPEC’s side
That seems unlikely to happen, however, given the vast reserves of US oil shale that become viable to extract with prices above $50 a barrel.
The 2014 price crash came as a result of OPEC trying to take out shale oil producers by flooding the market with cheap oil.
It worked in the short term, with many US rig contractors going to the wall.
Then, towards the end of 2016, OPEC nations decided they had had enough of cheap oil and tried a different tactic – turning off the taps.
Saudi Arabia persuaded a group of 24 countries, including the 13 other OPEC members and Russia, to curb global output by 2% to 1.8 million barrels a day.
The supply cuts pushed prices back up above $60 – but that just allowed the US shale-oil drillers to get back in business, pegging the price in the $60s.
US oil fracking is keeping the price of oil in check Photo: Shutterstock
There are other factors, too – notably Iran and Venezuela, two of the world’s biggest producers.
Iran sanctions looming
Iran had been locked out world oil supplies as a result of global sanctions, only lifted in 2016. But the country is bidding to regain its share of the world’s oil market – it was producing 4 million barrels per day prior to sanctions being imposed.
US president Donald Trump could stop that plan in its tracks, however. He has made no secret of his dislike of the “terrible deal” that brought sanctions over Iran’s nuclear programme to an end.
With the sacking of former US Secretary of State Rex Tillerson, things are going to get a whole lot tougher. His replacement, the hawkish ex-CIA director Mike Pompeo, signals a major toughening of foreign policy, and Trump has warned the US will reimpose sanctions if further concessions are not made by Iran ahead of the 12 May deadline.
US president Donald Trump has made no secret of his dislike of the “terrible deal” that ended sanctions on Iran Photo: Shutterstock
Venezuela facing further hit
The US has also imposed sanctions on Venezuela. The country has the world’s largest proven reserves of oil, but is on the verge of economic collapse after years of mismanagement by Marxist leader Hugo Chavez, and his successor Nicolas Maduro, who took over after Chavez’s death in 2013.
As a result of President Maduro’s attempt to change the constitution to consolidate his power, the US imposed new sanctions last August.
The move has seen oil exports fall by up to 800,000 barrels a day, according to RBC Capital Markets, but further sanctions threatened by Trump could see that slump deepen to one million barrels a day.
Conflicting forces at work
There are, then, effectively, two conflicting forces at work in the oil market. On the one hand you have OPEC’s production curbs, and the prospect of sanctions on Iran and Venezuela. On the other, you have the US shale drillers – the higher prices go, the more profitable fracking becomes.
Alternative energy sources are helping to reduce global demand for oil Photo: Shutterstock
Furthermore, as the West and other major economies such as China look increasingly to green energy sources, demand for oil is likely to continue to flatline. In fact, the latest figures (Q1 2017) show demand falling to 96.5 million barrels per day, from 96.8m b/d in the previous quarter, according to figures from the International Energy Agency.
Russia’s economic recovery, after a two-year recession ending in 2017, is fragile. It will be further undermined by global isolation following the nerve-agent attack in the UK, and its support for the barbaric Assad regime in Syria,
and its use of chemical weapons. Russia needs those petro-dollars, and the appeal of curbing production seems to be waning.
Whatever Saudi princes may wish for, don’t expect oil to hit $80 a barrel any time soon – while hopes it may one day return to three-figure territory are little more than a desert mirage.
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Baystreet Staff - Friday, April 20, 2018
Disaster Looms Over Libyan Oil
Is General Khalifa Haftar dead or alive? The leader of the Libyan National Army disappeared from the public eye earlier this month, and now rumors surrounding his health are beginning to circulate. Some media reports say he is dead, others insist he is alive.
If we are to trust a quote by Libyan Express of the French foreign minister, Haftar is alive and recovering after medical treatment in Paris. Yet, the possibility of him losing his position of power has already fueled fears about the future of Libya and its oil wealth. These fears are very likely to stoke oil prices further.
Haftar’s LNA, affiliated with the eastern Libyan government based in Tobruk and not recognized by the UN, was responsible for the revival of Libya’s oil industry after two years ago it retook the four export terminals in the Oil Crescent from the Petroleum Facilities Guard. The LNA made it possible for the National Oil Corporation to lift the country’s daily production rate to 1 million barrels and above. That’s up from about 300,000 bpd before the takeover of the terminals.
The task has not been easy, however, and this fact highlights the dangers inherent in what could turn out to be an inflection point for Libyan politics and oil. As one commenter, Tarek Megerisi, said, even if he is alive, Haftar is an elderly man and no certain successor for him at the helm of the LNA has been picked.
Libya’s recovering oil production has been a swing factor for oil prices since 2016. When it was on the rise, prices fell. Yet there were so many outages as various groups vied for attention and money by blockading pipelines and oilfields that prices rose on news from Libya pretty much as often as they fell on reports from the North African nation that sports the largest oil reserves on the continent.
In this context, it’s safe to assume the first thing that happens in case Haftar is incapacitated would be a resurgence of rival factions, including extremists that he squashed, seeking to regain lost ground and influence. Those intimately familiar with the situation in Libya such as Megerisi note that the LNA itself is far from a solid, coherent organization. There are internal rivalries as the army is made up of regular military personnel, tribal forces, and various militias. So, the short version of what will happen in case of Haftar’s demise is chaos.
Analysts interviewed by CNBC have suggested that if the LNA gets beheaded, its rivals—and probably parts of it—will rush to the Oil Crescent to secure control over whatever part of the oil producing and exporting infrastructure they can. Production will naturally be disrupted and so will exports, until the dust settles, if ever.
One conservative estimate of the effect of this chaos on oil production from Eurasia Group is for a 200,000-bpd decline. This is an amount substantial enough to push prices higher, especially now that global supply is tightening thanks to OPEC’s efforts, but mostly on the back of Venezuela’s strife. Exactly how high prices will jump is difficult to say, but with a sufficient degree of chaos in Libya, Brent could inch a lot closer to the US$80 level that Saudi Arabia now eyes as its preferred price.
And there’s something else. Even if Haftar is alive and indeed well, chaos may resurface. Yesterday media reported that the LNA’s chief of staff survived an assassination attack with a car bomb. Though it is unclear who was behind the attempt, Libya experts believe the LNA is a blink away from internal fragmentation, which will doubtless spread outside the organization and embolden rival groups to make a power grab for the country’s oil.
By Irina Slav for Oilprice.com
Read more: Oil set to stay stuck in $60s as Russia hints production curb may end
https://capital.com/oil-set-to-stay-stuck-in-60s-as-russia-hints-production-curb-may-end
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