INDUSTRY INSIGHT
Crude oil bulls slowed their charge after smashing through the red flag of $70 per barrel earlier this month. In the wake of peaking at a three-year high in the middle of the month, Brent crude decelerated to $66.61 per barrel at the time of writing. It seems that investors and oil-producing countries are eyeing global demand, which is staying steady at the same time as the Opec’s supply cuts are kicking in the expected results.
Still, far from raising its expectations, the International Energy Agency (IEA) maintains its full-year forecast for global demand for 2018 at the level of 99.1 million barrels per day. The energy monitoring body is unimpressed by oil price’s rally in January, putting it down to falling stocks, supply issues in the North Sea and Libya and geopolitical tensions. Physical markets were softer and oil products failed to match the benchmarks’ increases, according to the IEA. It’s true that investors are focusing on tightening oil markets, but I agree with the IEA that the factors behind January’s rally were mostly temporary ones and their effect is limited compared to the biggest fundamental driver: the Opec’s supply cuts versus US output.
Recently, there have been more concerns circulating about Opec members’ compliance with the supply-cut deal. The doubts zero in on Kazakhstan, which is rapidly getting a reputation as the leastcompliant Opec member when it comes to supply cuts. Far from cutting supplies in 2017 by 20,000 barrels per day as agreed, Kazakhstan’s oil exports quickened to the tune of 200,000 barrels per day, according to reports.
In addition, the IEA predicts that US oil production could very soon overtake that of Saudi Arabia and rival Russia’s. US oil production is forecast to rise from 870,000 to 1.1 million barrels per day in response to rising energy prices. Oil supplies are expected to climb on a wider scale also, with non-Opec production swelling by 1.7 million barrels per day in 2018. Compare that to global oil demand, which the IEA pegs at 1.3 million barrels per day, meaning that a plentiful supply could persist through the year.
This scenario doesn’t take into account Venezuela’s diminishing supplies, which is a significant factor for Opec’s re-balancing target. The country’s oil output is at a 30-year low, adding to market concerns about supply disruptions due to geopolitical problems. Paradoxically, Venezuela’s supply woes are at the same time calming fears over Opec members compliance with supply cuts.
While energy markets mull the near-term future of oil prices, the Opec’s next meeting is set for April, meaning that there are several months until the group issues firm guidance or reassuring messages. As a result, the oil price may drift to a default level near $60 per barrel under pressure from the rising US output. The alternative scenario is that geopolitical strains pump up the oil price, there are still red flags in the Middle East. Add that to the lower US dollar making oil an attractive buy, and the upward trend has a chance of being sustained in the short term.
In short, the quicksand represented by the relatively generous oil supply and stocks is still a potential drag on Brent, and shouldn’t be underestimated going forward. The writer is chief market strategist at FXTM. Views expressed are his own and do not reflect the newspaper’s policy.