Like a supertanker, the oil market needs time to change course
The oil price was on a downward trajectory for most of August. The trend continued well into last week with Brent rebounding slightly on Friday afternoon.
This can be attributed to several trends: The decision of OPEC and its 10 non-OPEC allies during their June 23 meeting to reduce the overcompliance to full compliance of the production cut agreement reached in December 2016, which had been intended to manage output.
In June, compliance stood at 152 percent and last week it was closer to 97 percent, according to the IEA. This move injected more than 1 million barrels per day (bpd) into the system.
Although Saudi Arabia, in particular, had acted swiftly in producing more, it initially took some time until markets reacted.
We all remember Donald Trump’s tweets voicing frustration with high oil prices at the beginning of July. The lesson here is that OPEC measures generally do work, but one must give them time to gain traction.
It is noteworthy that Saudi Energy Minister Khalid Al-Falih intends to institutionalize the cooperation between the 15 OPEC countries and their 10 non-OPEC allies. In his view, this will ensure a reasonably fast reaction mechanism to the vagaries of the markets.
OPEC measures generally do work, but one must give them time to gain traction
The fear over trade wars also affected the outlook. Donald Trump seems to have reached an agreement with Jean-Claude Juncker for a zero-tariff trade zone. The two chiefs might have agreed, but it will take the technocrats time to hammer out detailed agreements.
Economists still worry about the harsh rhetoric between the US and China as far as trade is concerned. It does not bode well for the global economy, growth or demand for crude, when the world’s two largest economies are at each other’s throats. The IMF’s unwavering commitment to 3.9 percent growth forecasts for this year are neither here nor there as far as market sentiment is concerned. The next installment of the China-US trade war tit-for-tat beckons this week.
Last week the Turkish lira was in freefall. Presidents Trump and Erdogan were unable to find an agreement over the release of American evangelist pastor Andrew Brunson. Instead they imposed tariffs on each other’s exports. While Turkey is still a relatively small economy, markets wobbled and we saw contagion spreading to other emerging markets.
All of the developments came against the monthly reports of the IEA and OPEC, both of which saw the short-term demand growth slowing for the third quarter and supply rising, partially due to the release of crude from the deal between OPEC and non-OPEC producers and partially by a bullish outlook of non-OPEC production over the next 12 months. (The IEA expects non-OPEC production to grow by 2 million bpd this year and 1.85 million bpd next.)
The IEA highlighted the supply boost by Saudi Arabia and Russia as well as high US exports in June.
Analysts are divided in terms of where they see markets going over the next few months. A lot will depend on how heavily the Iran oil sanctions bite. The sanctions could take 1 million or even 1.5 million bpd out of the market come November, depending on the degree to which China, India and smaller countries such as Turkey comply.
Venezuela is another factor in the supply game: More than 1 million bpd have come off the market over the past year or so. It does not look as though there was any respite in sight as far as the Venezuelan economy goes.
According to the IEA, OECD stocks are by now 32 million barrels below their five-year average. The US EIA surprised the markets last week when it reported crude oil inventories unexpectedly rose by 6.2 million barrels during the week ending Aug. 10. In the longer run, there are infrastructure shortages in the shale space and the outlook for US production will depend on how quickly they can be resolved.
In the meantime, we can expect OPEC and its 10 non-OPEC partners, particularly Saudi Arabia and Russia, to do what they can to make up for temporary shortfalls in supply. The fact that it took time for markets to adjust when the 25 countries took a decision in June should serve as a sign that we should give their measures more time to have the desired effect.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources