Volatility is the name of the game in oil markets

Volatility is the name of the game in oil markets

All eyes will be on the oil market this week. The driver will be geopolitical worries surrounding developments in the Middle East. This comes against the backdrop of a market that is tighter than it has been in more than a decade. 

The International Energy Agency (IEA) dubbed the current state in oil as the twin peaks. Rarely have we seen production this high and never consumption. It expects consumption to reach 100 million barrels per day (bpd) in the fourth quarter. 

An appreciating dollar, combined with an oil price of more than $80 per barrel, is a dampener on economic growth in some emerging markets. The earnings season will also show how the oil price affected companies whose operation depends on the use of oil. The biggest impact can be seen in the transportation sector. Several airlines have already issued profit warnings. However, the price of oil has a bearing on virtually all sectors in the real economy.

Hence the International Energy Agency lowered its demand forecast by 110,000 bpd, citing the high oil price and trade frictions as a reason. This still leaves demand at a respectable 1.2 million bpd in 2018 and 1.4 million bpd for 2019. OPEC’s forecasts are a notch higher, as always.

Libya and Nigeria are unreliable, because both countries have to deal with their difficult internal political situations

Cornelia Meyer

Markets were already tight, mainly owing to Venezuela’s domestic precarious situation. The country has halved since 2016 and might well go below one million bpd next year, if the current trajectory is any indication. Libya and Nigeria are unreliable, because both countries have to deal with their difficult internal political situations. 

That said, Libya produced a whopping 1.05 million bpd in September. The IEA sees Iraq, Libya, Nigeria, Iran, and Venezuela as OPEC countries with the biggest potential for future incremental production. There is a big uncertainty attached to that outlook, because all of these countries will need to overcome their own set of internal challenges.

OPEC Secretary-General Mohammed Barkindo said at last week’s Oil & Money conference in London that markets were adequately supplied. The recent numbers seemed to validate his thesis. Organization for Economic Cooperation and Development (OECD) stocks grew by 500,000 barrels in the second quarter and are set to do the same for the third quarter, according to the IEA.

All of the above sounds good. However, markets are incredibly tight. OECD stocks stand below the five-year average (a metric closely watched by traders). This means that every development and rumor has a big impact. Volatility is the name of the game. 

The uncertainty over how many barrels the Iran sanctions will take out of the market led to price spikes where Brent surpassed the 85 dollar-per-barrel benchmark. (Iran has taken more than 500,000 bpd off the export market so far. There is big uncertainty over how big the drop in exports will be come Nov. 4, when the sanctions set in.) On the other extreme, both Brent and WTI tumbled, when global stock markets retreated last week.

The exchange between the US, the UK, France and Germany with Saudi Arabia over the Khashoggi affair over the weekend created more geopolitical uncertainty. Expect oil prices to rise in the short term and to oscillate disproportionately with every bit of news, whichever corner of the globe it comes from.

If you overlay uncertainty on a tight market you will always end up in the land of volatility. The thing to do is to take a deep breath and discount the statements from both the prophets of doom and from the ones who promise you a Goldilocks scenario.

  • Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources
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