Geopolitical events push oil prices above $70/b

OPEC output cuts compliance reaches a record 163%

KUWAIT: Oil prices were the ultimate beneficiary from a number of geopolitical events that took place over the past few weeks that led to increased volatility in the oil market and making oil the only asset class to scale new highs in 2018. The first push came from the ongoing US/China trade talks with the two countries trying to restrict flow of goods and services between these countries by way of tariff impositions.

This initially resulted in a trade war like situation by the end of March-18 pushing oil prices down as it would’ve threatened global economic growth, but positive attempts were made in the last week to defuse the situation resulting in a positive impact on oil prices. IEA, in its monthly report, also highlighted the risk on oil demand coming from the US/China trade tariffs. These concerns also impacted gold prices, as prices moved closer to the highest level witnessed in two years.

Meanwhile, the geopolitical situation in the Middle East escalated to new high since the start of April-18 sending shockwaves across the oil market. Prices reached the highest level since 2014 after news of US intervention in the region led to Brent crude surpassing the $72/b mark. The market is also looking at whether the US and the European Union would reimpose sanctions on Iran with a possible decision sometime in May-18 that has the potential to result in supply disruptions in the oil market.

In terms of OPEC supply, the group lowered the production even further by 201 tb/d, according to OPEC secondary sources, while Bloomberg data showed a decline of 170 tb/d while producing at an average rate of 32.04 mb/d, the lowest level since May17. The decline came primarily on the back of lower production in Venezuela, Libya, Algeria and Angola partially offset by higher production in UAE and Nigeria. This pushed up OPEC compliance to the ongoing production cuts to a record 163 percent for the fifth consecutive month, according to IEA.

Moreover, the recent oil price rise was not just led by supply-side factors. Oil demand is also said to have risen, especially from the OECD countries, according to OPEC monthly report. This prompted an upward revision in oil demand growth for 2018 by 30 tb/d, as compared to last month’s forecast, to a growth of 1.63 mb/d. On the other hand, although IEA kept its global oil demand growth forecast for 2018 unchanged at 1.5 mb/d, the agency also highlighted strong demand in OECD during Q1-18 led by cold weather in the US and the start-up of a petrochemical project.

As highlighted in our previous reports, KAMCO Research reiterates that the current surge in oil prices are backed by numerous fragile factors. We see that fundamentals have taken a backseat currently and markets are moving on external factors. Also, higher oil prices makes the production cut agreement more susceptible to opposition from members seeking to take advantage of the prices rather than allowing the US to produce unabated.

Oil prices

Average monthly oil prices were almost flat m-o-m during March-18 after healthy gains during the third week of the month were offset by declines towards the close of the month led by trade conflicts between US and China. The weakness extended during the initial trading days in April-18 but geopolitical concerns in the Middle East coupled with signs of healthy oil demand and continued low supply pushed prices up during the second week. Average OPEC crude grade prices were recorded at $63.8/barrel while Kuwait crude and Brent Spot were at 62.23/barrel and $65.9/barrel, respectively.

Crude oil inventories in the US continued to fluctuate on a weekly basis with the latest report pointing to a build as against analyst expectations of a small draw. Production in the US reached another record high of 10.5 mb/d which along with higher imports resulted in higher inventory levels. API reported an inventory build of 1.8 million barrels during the week ended 6-April-18 while EIA weekly report showed an almost double inventory build of 3.3 million barrels. Nevertheless, average inventories for the last four weeks were reportedly stable as compared to the same period last year.

On the other hand, the IEA kept its global oil demand growth estimates for 2018 unchanged at 1.5 mb/d after higher demand from OECD countries and from India was offset by a downward revision to demand data for non-OECD countries, including China. According to the monthly report, global oil supply declined by 120 tb/d during March-18 led by higher compliance from OPEC producers, although rising US output partially offset this decline. In one of the significant developments, the IEA report said that OECD commercial stocks declined by 26 million barrels to reach 2,841 million barrels, merely 30 million barrels above the five-year average, the indicator used to gauge the effectiveness of OPEC’s production cuts. It is expected that the average could be reached by May-18, post which the direction on the future cuts would be expected.

World oil demand

World oil demand growth estimates for 2017 was revised up by 30 tb/d to 1.65 mb/d reflecting updated data for OECD and non-OECD regions. Oil demand data for Q4-17 was updated for OECD Europe with an upward revision of 0.12 mb/d reflecting data for Turkey, Poland and France driven by higher middle distillates requirements. For the same quarter, data for China and Other Asia in the non-OECD group was also revised upwards by 20 tb/d each backed by positive oil demand growth in these regions. Demand expectations for 2018 was also revised up by an equivalent amount to a growth of 1.63 mb/d to reach 98.7 mb/d with Q4-18 demand expected to reach a historical significance level of 100 mb/d. The revision reflected better-than-expected data from OECD countries for Q1-18 with an increase of 0.13 mb/d on the back of higher industrial activity, colder-than-expected weather conditions and strong mining activity in OECD Americas (US) and OECD Asia Pacific (Japan, South Korea and Australia). On the non-OECD side, the other Asia region saw a demand upgrade of 30 tb/d for Q1-18 reflecting betterthan-expected demand from industrial and transportation sectors. Downward adjustments were made in demand growth figures for the Middle East region by 30 tb/d for Q1-18 highlighting lower-than-expected regional oil demand developments. In the US, gasoline demand was reportedly up in January-18 after a two month slump based on latest available figures backed by higher mileage. The increase in diesel demand was even higher by 0.6 mb/d or 16.2 percent y-o-y on the back of higher demand in transportation and industrial sectors coupled with colder weather in large parts of the country. Preliminary data for February-18 and March-18 also showed a continued trend of increasing oil demand in the US, although at a slightly lower pace supported by road transportation and industrial fuels segments.

World oil supply According to preliminary data, global oil supply increased by 0.18 mb/d m-o-m to reach 98.15 mb/d in March-18 (including OPEC NGLs) as a result of higher non-OPEC oil supply to the tune of 0.38 mb/d to average 66.2 mb/d. In terms of individual producers, US, Norway, UK, Bahrain, Brazil, Latin America, Russia and China increased production during the month that was partially offset by decline in production in Colombia, Oman and Kazakhstan.

Non-OPEC oil supply estimates for 2017 was revised upwards by 0.03 mb/d to an average of 57.9 mb/d indicating a growth of 0.9 mb/d led by revisions in historical production data for Canada to show a growth of 0.9 mb/d for the full year. Non-OPEC supply growth figures for 2018 were also revised upwards by 0.08 mb/d to a growth of 1.71 mb/d to reach an average of 59.61 mb/d led by higher-than-expected supply from Russia and the US during Q1-18. Revisions to supply estimates included Canada (+51 tb/d), the US (+36 tb/d), Malaysia (+28 tb/d), Brunei (+20 tb/d), Russia (+19 tb/d) and China (-35 tb/d). Non-OPEC supply during March-18 witnessed a m-o-m growth of 0.38 mb/d, based on preliminary numbers, to average at 59.74 mb/d. The month saw higher production in all the regions except in Other Asia and Russia. The higher supply estimates for Canada was due to the starting and ramping of several new projects that will also be reflected in the coming months, although Q2-18 will see heavy maintenance activity. Brazil is also expected to raise production in 2018 by around 0.21 mb/d led by installation of eight new FPSOs this year.