Oil prices gained more than 1 per cent, ending a run of weekly declines on signs that Iran sanctions may limit global supply and that a trade war may not curb China's appetite for US crude.
This week, traders will likely focus on factors that could see oil prices trade over $70 per barrel. In the tug-of-war for market attention between supply and demand, the supply side seems to be winning now. News of slowing supplies and higher demand drove prices up over 5 per cent in the week.
Perspective
Iran sanctions - Worries that the sanctions on Iran will remove significant volumes of crude from the market underpinned prices last week. For Iran, its oil customers have started to drastically wind down purchases of Iranian crude ahead of the US sanctions. Iran’s exports plunged by 6,00,000 bpd compared with July loadings due to plummeting flows to India, Tehran’s second-largest oil customer.
During August 1-16, Iranian oil exports averaged 1.68 million bpd. This compares with average exports of 2.32 million bpd for the whole of July and 2.10 million bpd in the first 16 days of July. Demand from Japan remained steady, but South Korea is not importing Iranian condensate for the second consecutive month in August. Demand in Europe was up strongly, especially from Italy.
In another blow to the Iranian regime, French oil major Total SA (TOT) has confirmed that it would end a multi-billion dollar gas project in the country because it is unable to obtain a project-specific waiver from the US authorities. Traders are worried that Iranian sanctions could severely undersupply the oil market as soon as Q4 2018.
Demand worries - Traders are expressing caution due to concerns over Chinese demand and the impact of the US–China trade dispute. The trade talks ended with nothing major accomplished. Instead, both countries activated another round of duelling tariffs on $16 billion worth of each other’s goods. China imposed tariffs on a second round of US goods in retaliation of US tariffs, targeting oil products and coal for the first time and leaving open the possibility of including crude oil and LNG next.
On the positive side, China’s Unipec will resume purchases of US crude oil in October after a two-month halt due to the trade row between the world’s two largest economies.
Inventory report - US crude oil stockpiles fell more than expected as imports declined and refinery runs held close to record highs while gasoline and distillate inventories rose. Crude inventories fell 5.8 million barrels compared with expectations of a decrease of 1.5 million barrels. Crude stocks at Cushing, Oklahoma, the delivery hub for US crude futures, rose by 772,000 barrels. Gasoline stocks rose 1.2 million barrels, compared with expectations of a 488,000-barrel drop. Distillate stockpiles rose by 1.8 million barrels against expectations of a 1.5 million barrels increase. US crude production rose 1,00,000 bpd to 11 million bpd last week.
US energy companies cut nine oil drilling rigs last week, dropping to 860, the biggest reduction since May 2016. Traders also watched for a potential supply disruption in the North Sea, where workers are planning three oil and gas platform strikes next month. Oil production will stop during the strikes, which means about 45,000-50,000 barrels per day will be taken off the market.
Mexico’s president-elect Andres Manuel Lopez Obrador (AMLO) will reportedly suspend oil auctions for at least two years. AMLO wants to revise some of the energy laws that govern the oil and gas sector, which could dramatically alter the landscape for foreign oil and gas companies. This would signal that the continuity of the oil opening may be in doubt.
Mexico’s oil production has been declining for over a decade, falling to 1.9 million barrels per day recently, down from 3.4 mbd in the mid-2000s. The IEA sees output falling by another 130,000 bpd this year, due to the ageing offshore oil fields although that is a narrower decline compared with the 235,000 bpd the country lost last year. AMLO is aiming to boost production by 600,000 bpd over the next two years, which will be a monumental task.
Market participants also tracked comments on Saudi Arabia's decision to go ahead with public listing of its state owned oil company Aramco. Saudi energy minister Khalid al-Falih firmly had refuted media reports that the kingdom had shelved its long-mooted plans to list Aramco shares. The listing has been repeatedly pushed back as Saudi Arabia sought a higher oil price environment and officials clashed over how to proceed, including over disclosure requirements and the venue for the listing.
Hedge funds and other money managers cut their bullish wagers on US crude futures to the lowest level since mid-June.
Outlook: Overall, traders continue to argue over supply since the impact of the Iran sanctions won’t be known until November. In the meantime, the bears will continue to try to build a case for a drop in demand because of the trade dispute. The wild cards this week will be worries over the impending strike which will strip more supply from the market, and the US Dollar.
A weaker dollar could drive up foreign demand for dollar-denominated crude oil. We expect that Brent crude oil is likely to remain range-bound within a $65-75 per barrel range. With short-term focus switching to supply, we see some additional upside potential towards $80 per barrel.
(The author is AVP-Commodity research, MOFSL)
Source: The Economic Times