In oil mar­kets, at­ten­tion shifts back to fun­da­men­tals

The Myanmar Times - - International Business - MRIGANKA JAIPURIYAR

AT the S&P Global Platts Asia Pa­cific Petroleum Conference in Sin­ga­pore late Septem­ber, an­a­lysts vig­or­ously de­bated if the oil mar­ket was near­ing the end of the ‘lower for longer’ phase. Global crude bench­mark prices had ral­lied by al­most 9 per­cent in Septem­ber, of­fer­ing oil pro­duc­ers a glim­mer of hope that prices may have bot­tomed out.

But as the im­pact of the two key driv­ing forces be­hind the rally – Hur­ri­cane Har­vey and the Kur­dish ref­er­en­dum – soft­ens, prices are com­ing off and fo­cus has re­turned to de­mand and sup­ply, and fun­da­men­tals may not be bullish enough yet to put prices on an up­ward tra­jec­tory.

A price chart seen by Platts showed that the front-month ICE Brent crude fu­tures con­tract ral­lied to a two-year high of $59.49 a bar­rel on Septem­ber 26, from a June 21 low of $44.35 per bar­rel - the low­est level since Novem­ber 14 last year.

But the front-month Brent fu­tures con­tract has re­cently pulled back from the peak as funds un­wound some of their long po­si­tions amid profit-tak­ing in­ter­est.

Hur­ri­cane Har­vey, which slammed the US Gulf Coast in late Au­gust, took out pipe­lines and ports and roughly 2.3 mil­lion bar­rels per day of re­fin­ing ca­pac­ity ei­ther via full shut­downs or lower op­er­at­ing rates. This led to a sharp draw­down in prod­uct stocks, which sent prices ral­ly­ing on an­tic­i­pa­tion that re­fin­ers will run at full hilt to re­cover lost out­put when they come back on­line, par­tic­u­larly with peak sea­sonal de­mand for diesel around the cor­ner.

Prices also rise in re­ac­tion to the pos­si­bil­ity of a stop­page in crude flows of around 600,000 bar­rels per day from Kur­dis­tan after it held a non-bind­ing ref­er­en­dum on Septem­ber 25. The ref­er­en­dum sparked an in­ter­na­tional out­cry, a swift re­buke from Bagh­dad and some harsh rhetoric from Tur­key, which threat­ened to «turn off the tap» of the oil pipe­line send­ing Kur­dis­tan-con­trolled crude to Cey­han.

That has not hap­pened though, and ex­ports through the Kur­dis­tan ex­port pipe­line into Tur­key re­main steady at nearly 600,000 bar­rels per day.

Mean­while, per­sis­tence by US shale pro­duc­ers is likely to slow the pace of stock draw­downs.

That has reawak­ened con­cerns about an in­dus­try over­sup­ply in the mar­ket. At APPEC, the In­ter­na­tional En­ergy Agency’s (IEA) chief Or­gan­i­sa­tion of Petroleum Ex­port­ing Coun­tries (OPEC) oil an­a­lyst, Peg Mackey, said a «sharp de­cline of in­ven­to­ries next year looks un­likely.» US shale pro­duc­ers will play a crit­i­cal role in bring­ing back sup­ply as many have al­ready made in­vest­ments that will al­low them to sur­vive in a lower-priced en­vi­ron­ment, she said.

In fact, a panel of in­dus­try an­a­lysts agreed at the conference that grow­ing sup­ply is likely to out­strip de­mand next year, lead­ing to mar­ket sur­pluses. Most agreed that the OPEC/non-OPEC coali­tion will need to ex­tend its pro­duc­tion cut agree­ment through all of 2018 for the mar­ket to bal­ance.

The IEA es­ti­mates non-OPEC sup­ply to grow by 700,000 bar­rels per day this year, ris­ing fur­ther to 1.5 mil­lion bar­rels per day for 2018.

Still, with global in­ven­to­ries shrink­ing, the oil mar­ket is «ev­i­dently well on its way to re­bal­anc­ing,» Kuwaiti oil min­is­ter Es­sam al-Mar­zouq said.

De­mand trends look promis­ing , at least for now. In its Au­gust monthly re­port, the IEA lifted its es­ti­mate of 2017 oil-de­mand growth for a third month in a row to 1.6 mil­lion bar­rels per day after year-on-year growth of 2.3 mil­lion bar­rels per day in the sec­ond quar­ter, led by the US and Europe.

Mriganka Jaipuriya is As­so­ciate Edi­to­rial Di­rec­tor, Asia & Mid­dle East En­ergy News & Anal­y­sis, at Platts

Photo: EPA

Work­men start the task of clean­ing up a home that was flooded by rains from Hur­ri­cane Har­vey in the King­wood neigh­bor­hood of Hous­ton, Texas. The hur­ri­cane sent oil prices surg­ing in its wake. How­ever, prices have since soft­ened.

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