Gathering storms eclipses $30 per barrel

The storms are gathering. There are pointers that several factors appear to be coming together to help oil price recovery beyond the OPEC production output cut deal. Data from China show an uptick in oil imports by 1 million barrels per day in September, from a month earlier. Then there is anxiety over President Trump’s decision to decertify the Iran nuclear deal, plus simmering tension in Iraq likely added a bit of upward pressure on crude prices.

West Texas Intermediate for November delivery added 85 cents to settle at $51.45 a barrel on the New York Mercantile Exchange. Total volume traded was about 6 percent below the 100-day average. Prices are up 4.4 percent.

Brent for December settlement climbed 92 cents to end the session at $57.17 on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a premium of $5.44 to December WTI.

President Trump has confirmed his plan to decertify the Iran nuclear deal. The move could ratchet up tensions between the two nations. Though he will stop short of calling for new sanctions. It is believed that he will ask the US Congress to hold off until the administration tries a new strategy to tighten the screws on Tehran. Iran promised a “crushing” response if the US declared the Revolutionary Guard a terrorist organization. As of now, the ramifications for the oil market are unclear, but probably not that significant in the near-term.

Also Kurdish authorities have sent thousands of troops to the key oil region of Kirkuk to defend the region, after the Iraqi government mobilized troops and tanks south of the city. The military movements raised concerns of a possible clash between the central government in Baghdad and Kurdish forces, a development that some fear could lead to civil war.

In China, the world’s second-biggest oil market, crude imports in September jumped to the second-highest on record. China has spent around $24 billion on building its crude reserves since 2015, at an average of $50 a barrel, and now holds around 850 million barrels of oil in inventory. While China’s spending on “excess” crude is tiny, given its $680 billion current account surplus since early 2015, its inventories are now equal to those of Japan and South Korea together, the Paris-based IEA said. Those countries’ combined demand is half that of China.

“Looking at 2017 as a whole, we expect Chinese oil demand growth to accelerate to 540,000 bpd from 310,000 bpd in 2016, supported by the strength in the first half of 2017. For 2018, we expect growth to slow to 325,000 bpd,” the IEA said.

On the back of recent developments, OPEC increased its demand forecast for its oil in 2018, and also said that the oil market could flip into deficit next year. OPEC forecast higher demand for its oil in 2018 and said its production-cutting deal with rival producers was getting rid of a glut, pointing to a tighter market that could move into a deficit next year.

The group said that the world would need 33.06 million barrels per day (mb/d) from OPEC, an upward revision of 230,000 bpd from its last forecast. That is the third consecutive month that OPEC has increased its demand projection for 2018 and it underscores the growing confidence in the impact of the collective cuts.

OPEC has signalled to the market that it could further broaden its OPEC/non-OPEC alliance, ramping up the rhetoric over the possibility of expanding its membership and trying to deepen its dialogue with US shale in order to rebalance the market.

“There is a growing consensus that, number one, the re-balancing process is underway,” Mohammad Barkindo, OPEC’s Secretary General said. “Number two, to sustain this into next year, some extraordinary measures may have to be taken in order to restore this stability on a sustainable basis going forward.”

Meanwhile, the IEA warned that while progress is being made, the inventory gains will stall next year as non-OPEC supply picks up pace. The Paris-based energy agency said that OPEC will probably need to take more dramatic action to accelerate the tightening underway.

A Deloitte survey of 250 oil executives found that the industry does not see oil rising above $60 per barrel next year and most see oil remaining below $70 per barrel through the end of the decade. That is marked shift from last year’s survey, which had some executives seeing a steady increase in prices.

But it seems $30 per barrel oil is a thing of the past. The oil market has erased enough of the surplus that prices will not return to $30 per barrel, according to the head of global oil analytics at S&P Global Platts.

“We think with the surplus stocks are mostly gone, we are not going to see $30 oil anymore,” S&P’s Gary Ross said. “We are basically in a $50 to $60 Brent world for the time being.”

FRANK UZUEGBUNAM