OPEC sees tighter 2017 crude market

Updated 12 July 2016
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OPEC sees tighter 2017 crude market

LONDON: OPEC has given an upbeat outlook for the oil market in 2017, saying global demand for its crude would be higher than its current production and pointing to a supply deficit rather than a sizeable surplus that has weighed on prices.
However, the Organization of the Petroleum Exporting Countries in a monthly report also cut its forecast for world economic growth this year, citing increased uncertainty following Britain’s vote to leave the European Union and said the pace of oil demand growth would slow slightly next year, in its first 2017 forecast.
“After the UK’s referendum to leave the EU, economic uncertainty has increased,” OPEC said in the report. “Potential negative effects have led to a downward revision of global economic growth in 2016 to 3.0 percent from 3.1 percent.”
Other forecasters including the International Monetary Fund have cut economic growth outlooks following the UK referendum. Concern about the economic impact of Brexit has weighed on oil prices, which at $47 a barrel have fallen from a 2016 high close to $53 in early June.
World oil demand will rise by 1.15 million barrels per day (bpd) in 2017, OPEC said, its first forecast for next year in the monthly report. That marks a slight slowdown from growth of 1.19 million bpd expected in 2016.
Oil prices have halved from two years ago in a drop that deepened after OPEC refused in late 2014 to cut output to support prices, hoping that cheaper oil would curb higher-cost rival supply such as US shale.
Despite a “dampening effect” of Brexit on the world economy next year, OPEC’s 2017 market outlook suggests the strategy is working as it expects oil supply outside the group to fall further, helping to boost demand for its own crude.
OPEC forecasts supply from outside producers will decline by 110,000 bpd in 2017 after an 880,000-bpd drop this year. The price drop since 2014 has hit non-OPEC supply as companies have delayed or canceled projects around the world.
Oil output from OPEC, adjusted to include returning member Gabon, rose 264,000 bpd to 32.86 million bpd in June, OPEC said. It expects demand for its crude in 2017 to average 32.98 million bpd, suggesting a supply deficit if OPEC keeps output steady.
Saudi Arabia told OPEC it raised output to 10.55 million bpd in June. The kingdom said it pumped 10.56 million bpd, a record, in June last year.
OPEC’s report points to a sizeable average surplus of 1 million bpd this year, but also to demand for its crude exceeding current production in the third quarter. The last full quarter when OPEC pumped less than demand for its crude was in 2013, according to past OPEC reports.
“The contraction seen this year in non-OPEC supply is expected to continue in 2017 but at a slower pace,” OPEC said. “Market conditions will help remove overall excess oil stocks in 2017.”


Oil markets jittery over lower demand forecasts

Updated 18 November 2018
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Oil markets jittery over lower demand forecasts

RIYADH: Oil prices continued to nosedive last week over demand concerns amid an outlook of a slowing global economy. The strong US dollar weighed on both oil prices and the global demand outlook. Currencies weakened against the dollar, eroding their purchasing power.
Brent was down to $66.76 per barrel and WTI dropped to $56.46 per barrel by Friday. The former came close to its one-year low as both the International Energy Agency (IEA) and OPEC released monthly reports that articulated a darkening demand outlook in the short term. This increased fears of an oil demand slowdown. Market fundamentals also suggest that price volatility is likely to remain high in the near-term, although the oil market reached a balance in early October.
OPEC’s Monthly Oil Market Report (MOMR) arrived with bearish sentiments, revising downward its oil-demand forecast for this year and next, for the fourth month in a row. It forecast that global oil demand will rise by 1.29 million barrels per day (bpd) in 2019, 70,000 less than what OPEC expected last month. The MOMR also forecast increasing non-OPEC supply growth for 2019, with higher volumes outpacing the annual growth in world oil demand, leading to an excess in supply. The report was welcomed with open arms by the IEA, which had been at least in part responsible for driving sentiment toward a bear market. Surprisingly, OPEC warned that oil demand is falling faster than expected. Necessary action is a must.
Saudi Arabia is not sitting idly by while oil markets look as if they are heading toward instability. Markets were expecting severe US sanctions on Iran, which could have resulted in supply shortages once Iran’s crude exports went to zero. The unexpected introduction of waivers to allow eight countries to continue importing Iranian oil, was however an eye-opener. Now, as the world’s only swing producer, Saudi Arabia will have to take other measures to balance oil markets and drain excess oil from global stockpiles.
Despite what some analysts are claiming, there is currently no strategy to send less oil to the US to help reduce US stockpiles. Yes, some have claimed that Saudi crude shipments to the US are at about 600,000 barrels per day this month, which is a little more than half of what was being shipped in the summer months. But the reasons for this are related to seasonally low demand, the surge in US inventories and refineries heading into their winter maintenance season. Remember that November crude oil shipments were allocated to the US refiners last month before the US waivers on the Iranian sanctions were revealed. Also, keep in mind that Saudi Arabia owns the largest refinery in the US, which has a refining capacity that exceeds 600,000 bpd.

Lurking on the horizon is the massive US budget deficit and increasing rumblings that the US economic boom is over. 

It must be noted that there is a degree of financial manipulation underway in the oil futures markets. At the moment, there are few places where quick profits can be made, so some investors moved from stocks to commodities. Now, there are downward pressures on oil prices as some commodities market traders went long on oil futures, thinking that crude prices would rise. Then these same traders shorted natural gas, assuming that with a warmer winter, prices of that fuel would fall. Unfortunately for the traders, Trump’s sanction waivers on Iranian crude oil exports and cold weather on the US East Coast, caused exactly the reverse to take place. Oil prices fell and natural gas prices rose. Traders were therefore forced to sell their assets to cover margins, pushing oil prices lower. It is expected that some hedge funds and investment funds will also be moving away from going long on oil futures and this will cause further selling.
Lurking on the horizon is the massive US budget deficit and increasing rumbling that the US economic boom is over. The US federal budget deficit rose 17 percent in the 2018 fiscal year. It is now larger than in any year since 2012. Federal spending is up and amidst US President Donald Trump’s tax cuts, and federal revenue is not keeping pace. To make matters worse, the strong US economy and interest rate hikes by the US Federal Reserve have boosted the dollar.
A strong dollar makes commodities such as crude oil more expensive in international markets and reduces demand. Trump wants oil to be priced as low as possible to help bolster the US economy, which is clearly under strain, and to facilitate sales of crude abroad. But with a looming global oil shortage just a few years away due to a lack of upstream investment, it is incumbent on global oil producers to consider the long term in their output decisions.

* Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza