WTI crude oil prices posted a biggest weekly gain in eight months, as they hit a 2-month high on surging geopolitical risk in the Middle East and prospects of an extension of Opec-led production cut into 2019.
Rising concerns that sanctions will be imposed on Iran after Donald Trump warned that the US would pull out from the nuclear deal, further supported the prices. Intensifying global trade war and rising US production may keep prices in the $ 58-66.8 range for some more time.
Concerns over looming trade dispute between the United States and China that weighed on global markets may impact crude oil prices too due to risk-off sentiment. Last week, Industrial Commodities fell after the US President signed a memorandum that could impose tariffs on up to $ 60 billion of imports from China. If selloff in the equities and industrial commodities widens this week, certainly it will also hamper crude oil prices.
Record US production and its possibility of surpassing the level produced by the world’s biggest producer Russia by the 2018 end seems to have taken drivers’ seat recently, giving strong challenges to the Opec-Russia’s joint efforts of reducing the global supply glut and market rebalancing. US oil production, driven by shale extraction, rose to an all-time high of 10.40 mbpd last week.
Opec led 1.8 mbpd supply cut has faced strong standoff from soaring US production, which has risen about 25 per cent since mid-2016, and is expected to contribute major part of global supply rise this and next year. No doubt Opec’s intention of market rebalancing and popping the prices up have worked well in their favour so far, but at the cost of market share, which they have lost to the US shale producers.
A number of guiding factors such as rising US production, global trade war fear with Opec-led supply cut, strong demand have confused the traders, leading to range consolidation wherein bulls are getting enough reason to take a charge near $ 60-$ 58 vicinity and bears are finding it overpriced near $ 64.5-$ 66.8 zone. And this range is likely to prolong some more time before dust gets settled and realistic fundamental factors will start having bearing on the prices.
Stronger than expected reduction in the OECD inventories towards five-Year average, which Opec has adopted as a benchmark for measuring the effectiveness of the production cut pact, had triggered strong prices rise in Q4 2017 and January 2018, taking the prices to a four-year high of $ 66.8 per barrel in January and brent oil close to $ 70 barrel, but recent series of upward revision in the global supplies led by the US had held back the relentless rise.
Reports from prominent oil agencies IEA, Opec and EIA echoed concerns over rising supplies despite strong demand projections, implying oversupplied market conditions for some part of this year. Crux are as under:
The IEA in its oil market report, March issue said supply from outside Opec, led by the US, would grow by 1.8 mbpd in 2018 versus an increase of 7,60,000 bpd last year. The supply increase is more than the IEA’s expected demand growth forecast for this year of 1.5 million bpd. They also said that global supply went up by 0.7 mbpd in February from a year ago to 97.9 mbpd. The agency also reported that commercial oil inventories in industrialised nations rose in January for the first time in seven months.
Opec MOMR March issue outlined that oil consumption would grow by 1.62 mbpd in 2018 while, Non-Opec supply would grow by 1.66 mbpd in the same period, mainly led by US shale production. OECD total commercial stocks, which had fallen to 2,851 million barrels in December 2017 from January 2017’s level of 3,070 million barrels, have gained first time in seven seven months by 13.7 mb month on month to 2,865 mb in January 2018, report further stated. Opec combined output dropped by 77,000 bpd to 32.186 mbpd in February led by declines in Iraq, the UAE and Venezuela. Opec oil demand is forecast at 32.6 mbpd this year, down by 0.2 mbpd from February assessment.
EIA, in its STEO March issue, forecasts that US production will average 10.7 mb in 2018 and 11.3 mb in 2019 from 2017’s average production of 9.3 mbpd. US oil production, driven by shale extraction, have rose to an all time of 10.38 mbpd in the week ended March 9, staying above top exporter Saudi Arabia’s output level and marching towards top producer Russia. Estimates by the EIA also show global supplies will rise above 100 mbpd for the first time in the Q2 of this year, while demand will only surpass that level in the Q3.
Compliance with an Opec deal to cut oil supply hit a new high in February and an inventory glut is shrinking fast, a joint Opec and non-Opec committee said, bringing producers close to the pact’s original aim. Opec and its allies achieved 138 per cent of pledged output reductions last month, up from 133 per cent in January and the highest since the deal aimed at clearing a glut began in January 2017.
Saudi Energy Minister Khalid al-Falih said Opec members would need to continue coordinating with Russia and other non-Opec oil-producing countries on supply curbs in 2019 to reduce global oil inventories. That needs to be done if they really want stable oil markets ahead.
As per Baker Hughes report, US oilrig counts, an indicator of future output, rose by four to 804, highest level in three years, in the week ended to March 23 against 631 units seen during same period last year.CFTC crude oil speculative net long positions rose to 7,037,000in the week ended March 23 from a week earlier level of 6,685,000 and fortnight ago level of 7,041,000.
(Tarun Satsangi is Head of Research for Commodities and Forex at Globe Commodities. He has 12 years of experience in financial markets. Views expressed in this article are author’s own and do not represent those of ETMarkets.com. Readers are advised to consult their financial advisers before taking any position based on these observations)