Confused oil market needs and will have limitation of supply

Nov. 26, 2018
Scrutiny of oil markets is difficult enough without high-level bluster fogging analysis.

Scrutiny of oil markets is difficult enough without high-level bluster fogging analysis.

After rising for most of 2018, the spot price of West Texas Intermediate crude oil plummeted to $55.63/bbl on Nov. 13 from a recent peak—though not the year’s high point—of $76.40/bbl on Oct. 3. Brent crude followed a similar pattern at a premium of about $10/bbl.

Memories of the devastating market crash that began in mid-2014 cannot be evaded.

The new swoon started from prices levered by continuing success of production restraint by 12 members of the Organization of Petroleum Countries and 10 collaborating countries, worry about supply from collapsing Venezuela and newly sanctioned Iran, and geopolitical tension, especially after the Oct. 2 killing of journalist Jamal Khashoggi in the Saudi consulate in Istanbul.

Those concerns apparently distracted the market from its own weakening. Complicating everything were waivers granted to eight traditional buyers of Iranian oil as long-anticipated sanctions took effect Nov. 5.

The official explanation: The countries, including high-demand China and India, had quit importing oil from Iran or shown solid progress toward doing so.

As a reward for buying less Iranian oil, therefore, the countries now may buy more Iranian oil for at least 180 days. Meanwhile, Trump rebukes Saudi Arabia by Twitter for discussing production cuts.

No wonder the market is confused.

The market, in fact, craves production restraint. Monthly market reports by OPEC, the International Energy Agency, and the US Energy Information Administration all project growth in non-OPEC supply well above growth in demand this year and next. Projections keep rising for non-OPEC supply. Calculated demand for OPEC crude consequently is down by 170,000-200,000 b/d this year and as much as 1 million b/d in 2019.

By this time next year, unless demand increases more than expected, production coordinators will have lowered supply systematically or price weakness will have done the job the painful way.

This will happen even if Trump tweets nothing more about the subject—a prospect welcome but unlikely.

(From the subscription area of www.ogj.com, posted Nov. 16, 2018. To comment, join the Commentary channel at www.ogj.com/oilandgascommunity.)