In oil markets, attention shifts back to fundamentals
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
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.