Crude ill health
Opec over a barrel due to an oil glut and stuttering growth
Oil markets are once again in the doldrums. Stuttering global growth and growing trade protectionism are raising concerns about too much crude sloshing about to meet demand. It is an old problem Opec can’t afford to ignore for long.
Despite the fact that global demand is expected to average an all-time record of 100 million barrels per day this year, warning signs are flashing over oil markets. Dubai’s ports operator DP World has given an early signal of the problems emerging in global trade, which is vital to underpinning consumption for crude. The world’s fourth largest operator of ports reported a slight drop in like-forlike container volumes in the third quarter, compared to the same period last year. Uncertainty over global trade was one of the reasons pinpointed by DP World for the decline.
Handling over 70 million containers each year, DP World is a useful barometer for trouble ahead in commodities, especially oil. The International Energy Agency has already trimmed its forecast for global demand growth next year by 100,000 barrels per day, to 1.3 million b/d, blaming trade disputes and a sluggish market in China for the revision.
Even more worrying, the IEA earlier this month flagged a build-up of commercial stocks of crude to almost 2.9 billion barrels, the highest level since February.
The watchdog warned inventories in major industrialised nations in the third quarter may have seen their largest increase since the start of 2016. All the signals point to a toxic scenario for oil markets taking shape with slowdown in demand, coinciding with the decision by major producers to pump more crude.
Prices climbing to four-year highs above $85 per barrel a few weeks ago, coupled with the inflationary impact of the strong dollar in emerging markets, have contributed to the problem. According to S&P Global Platts Analytics these factors have led to a 25pc increase in oil prices in places like India and Indonesia, which were forced to lower fuel duties to head off unrest over the rising cost of fuel.
Meanwhile, producers have been opening their spigots to take advantage of higher prices while they last. Opec’s 15 members pumped over 33 million barrels per day – equal to about a third of global supply – in September, according to figures compiled by S&P Global Platts. Excluding the Republic of Congo, it was the highest output level recorded by the group since July 2017.
Russia – which is expected to extend its alliance with Opec indefinitely when the group meets in Vienna in December – also pumped at a record approaching 11.4 million barrels per day last month. Meanwhile, the US is producing close to 11 million barrels per day, with the country’s shale boom showing few real signs of slowing.
Of course, US sanctions against Iran due to come into force early next month will create a gap in the market. Despite attempts by some major consumers to obtain waivers the sanctions could still remove 1.7 million barrels per day from the Islamic republic’s exports, compared with levels in May, according to estimates by S&P Global Platts Analytics.
Concerns also remain over the amount of spare capacity held by major producers like Saudi Arabia and the Gulf states to react to potential supply shocks. Saudi Arabia has the ability to pump up to 12 million barrels per day in theory but would have to agree a deal with its neighbour Kuwait
‘Oil producers have been opening their spigots to take advantage of the higher prices while they last’
to go beyond that by reactivating mothballed fields in the so called neutral zone, which separates the two states. Then there is the issue of Venezuela, where production could fall further due to the battered state of its economy and political system.
However, Opec is unlikely to repeat its mistake from 2014 when it stood back and watched the price of oil plummet by allowing a giant lake of unwanted crude in storage to build up. By the beginning of 2016 prices had fallen to $35 per barrel from a peak $115 per barrel in the middle of 2014 after the group attempted a knockout blow against higher-cost shale producers, which ultimately backfired.
Since then Opec has expanded its ranks and struck an alliance with Russia, which gives it control of around 45pc of the world’s oil. Earlier this year it decided to ease back on production cuts, which had restricted output by 1.8 million barrels per day, partly in response to criticism from US president Donald Trump and concerns over the loss of Iranian supplies.
Opec won’t want to repeat its previous mistake of oversupplying markets, despite Trump’s repeated complaints about high gasoline prices in the run-up to midterm elections in the US.
The group’s influential joint technical committee, which closely tracks trends in supply and demand, has already woken up to the risks. “The committee … expressed concerns about rising inventories in recent weeks and also noted looming macro-economic uncertainties, which may require changing course,” it noted after its most recent deliberations.
With oil prices now in retreat below $80 per barrel, the group may decide it is time to change strategy to avoid a repeat of 2014.