RIYADH: Oil prices continued their upward momentum and the price of Brent crude rose to $82.72 per barrel. This was the first weekly closing above $80 since October 2014. West Texan Intermediate hit $73.25 per barrel. The Brent/Dubai spread widened to $9.47 per barrel by the week’s closing on Friday. The recovery in oil prices owes much to the strength of global oil demand.
When OPEC met in November 2014 and decided to change its market strategy, global oil demand was about 92 million barrels per day (bpd). It has now grown to nearly 100 million bpd, with crude inventories down below the five-year average.
For the first time since August 2014, predictions have begun on the return of oil to $100 per barrel. This is happening in an atmosphere of uncertainty as further output increases from OPEC are yet to materialize. At present, the market is not in need of any production hikes to compensate for the US sanctions on Iran’s oil exports.
Revising oil price forecasts higher could be rational, but the fundamental bullishness might be tempered by theoretical concerns over demand that have no strong argument of support. Inventory drawdowns continue and global oil demand has risen 7.5 million bpd since the end of 2014.
The fall in Iran’s oil output has yet to result in growth in OPEC’s output because the market supply/demand balance is still not in a supply deficit. This is why OPEC’s decision for an output increase will follow Iran’s output decline inversely for the rest of 2018. OPEC’s output is likely to rise in 2019 as needed.
Should output be increased now or is it still premature to ramp up production?
This is the question that every market analyst is considering. There are arguments that the oil market cannot be tight and yet well supplied at the same time. This is true. But although the market is tight, supply deficits haven’t materialized. For instance, all Saudi Aramco crude oil customers have been allocated their requested monthly crude oil shipments in their entirety. This is a strong sign that there is not a supply deficit in the market.
Additionally, the US has decided to sell 11 million barrels of oil from its Strategic Petroleum Reserve (SPR). Deliveries are to take place in October and November. The US SPR currently stores 660 million barrels of oil in massive underground salt caverns. It is the world’s largest supply of emergency crude oil. March 2014 was the last time oil was released from the SPR on a test basis. That happened when oil prices were almost $30 per barrel higher than their current level. It is possible for the US President to decide to tap the US SPR to try to modulate oil prices for the first time, but many analysts believe such a move would be largely symbolic.
The release of 11 million barrels isn’t enough to make up Iran’s entire production but that might not be necessary. This week India confirmed that it will continue to import oil from Iran, albeit at a reduced rate. China has also reduced Iranian oil imports but continues to defend its energy trade with Tehran.
US President Trump could attempt to pressure India into a zero import position for Iranian oil, for without it his sanctions lack impact. However, efforts are under way by the EU, China and Russia to implement a barter system with Iran that will allow it to exchange oil for the imports it needs. OPEC is surely waiting to see just how much production is required before ramping up output.
Tapping the US SPR might not reduce oil prices amid the oil market tightness but instead further widen the Brent/WTI spread as a result of the difficulties facing shale oil producers in exporting their oil. This comes simultaneously with Cushing, Oklahoma inventories that are now close to tank bottoms.
Rebuilding of these inventories has begun though, with the usual rise off the seasonal lows likely to be assisted by a return to normal output from the Canadian oil sands in Alberta.