Impacted by the US decision to pull out of the Iran nuclear deal, the global oil market is switching its focus from the fundamentals to geopolitics, the International Energy Agency said in its latest Monthly Oil Market Report.
Meantime, the possibility of lower Iranian exports is not the only supply risk hanging over the market at present. In Venezuela, the pace of decline of oil production is accelerating and by yearend, output could have fallen by several hundred thousand barrels a day.
“The potential double supply shortfall represented by Iran and Venezuela could present a major challenge for producers to fend off sharp price rises and fill the gap, not just in terms of the number of barrels but also in terms of oil quality,” IEA said.
Oil prices, which had already risen on the back of steady demand growth, solid compliance with the Vienna Agreement, and a further fall in stocks, had now surged to above $77/bbl.
Because of rising prices, IEA lowered its estimate for 2018 global oil demand growth by 40,000 b/d to 1.4 million b/d, and it increased expectation for US oil production growth this year by 120,000 b/d.
The focus of the oil market has been on OECD stocks for some time, and new data show a further decline in March of 27 million bbl to the lowest level in 3 years and to 1 million bbl below the 5-year average figure.
“For now, the rapidly changing geopolitical landscape will move the attention away from stocks as producers and consumers consider how to limit volatility in the oil market,” IEA noted.
World economy, oil demand
The global economic outlook remains supportive, and IEA has updated its forecast with the latest International Monetary Fund’s projections.
The IMF expects world economic growth to accelerate to 3.9% in both 2018 and 2019 from 3.7% in 2017. While IMF’s projections for non-OECD countries are mainly unchanged, the outlook for developed economies has been revised up on recent strong data, especially for Europe and US. In the US, growth is expected to accelerate to 2.9% in 2018 from 2.3% in 2017. Projections for some emerging countries, such as Brazil and South Africa, have been markedly revised upward.
Global oil demand growth for 2018 has been revised slightly downwards in this report to 1.4 million b/d from 1.5 million b/d, due to higher price expectations. Now, world oil demand is expected to average 99.2 million b/d in 2018.
Oil demand at the start of 2018 was supported by cold weather in the US and Europe as well as by new petrochemical capacity in the US. Demand growth is expected to slow from 1.52 million b/d in the first half of 2018 to 1.35 million b/d in the second half, as support from harsh weather conditions vanish and the recent jump in oil prices will take its toll, IEA said.
Supply
During April, world oil supply held steady near 98 million b/d but was up 1.78 million b/d on a year ago thanks to booming non-OPEC supply.
Record output from the US pushed non-OPEC supplies up 2.1 million b/d above year-ago levels, with supply edging up month-on-month to stand at 59.4 million b/d. Heavy maintenance in Canada was more than offset by continued growth in the US and seasonally rising global biofuels production. According to IEA, non-OPEC output will grow by 1.87 million b/d in 2018, a slightly higher rate than seen in last month’s MOMR.
OPEC crude production eased by 130,000 b/d in April to 31.65 million b/d on further declines in Venezuela and lower output in Africa. Compliance with the Vienna Agreement reached a record 172%. The call on OPEC crude and stocks will average around 32.25 million b/d for the remainder of 2018, nearly 600,000 b/d higher than April output.
Iran uncertainty
US President Donald Trump made the decision to withdraw from the Iran deal on May 8.
“In these early days, there is understandable uncertainty about its potential impact on Iran’s oil exports, which are currently about 2.4 million b/d. There is a 180-day period for customers to adjust their purchasing strategies and it remains to be seen how waivers and other aspects of the sanctions will be implemented. In addition, other signatories to the Joint Comprehensive Plan of Action (JCPOA) have said that they will continue with the agreement,” IEA said.
The agency added that, when sanctions were imposed in 2012, Iran’s exports fell by about 1.2 million b/d.
Iran’s crude oil exports this year have averaged 2.1 million b/d with a further 300,000 b/d of condensates exports. Buyers in Asia account for 65% and Europe the remainder. China is by far the biggest lifter, with average purchases of 650,000 b/d, followed by India with 475,000 b/d. Both are importing more Iranian crude now than before sanctions were imposed.
As for potential alternative sources of supply, Saudi Arabia, along with neighbors Kuwait and the UAE, and Russia have the capacity to respond swiftly and with similar-quality crude to a cutback in Iranian exports, according to IEA.
