Geopo­lit­i­cal events push oil prices above $70/b

OPEC out­put cuts com­pli­ance reaches a record 163%

Kuwait Times - - Business -

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.

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