Energy Recap: The oil market wavers

Oil prices went in different directions at the end of the week. (File photo/AFP)
Updated 24 March 2019

Energy Recap: The oil market wavers

RIYADH: Oil prices went in different directions at the end of the week. Brent deteriorated to $67.03 per barrel and WTI rose to $59.04 per barrel, but both remain at four-month highs. 
Still, poor economic signals that added to the generally bearish mood did not manage to drive oil prices down because of the tightening global supplies that led the surprise drawdown in US inventories.
The 10 million barrels fall in US crude stocks was the largest drop since July 2018, due to a combination of strong exports and higher refining utilization. 
The reduced number of US oil rigs for a fourth week running sent drilling activity to its lowest in nearly a year.
The current level of oil prices does not reflect the market’s relatively strong fundamentals and supply tightness.
The Arabian Gulf sour crude grades have seen extensive buying activity with refiners securing spot cargoes in addition to their term cargoes.
Such high demand for the sour medium and heavy crude grades had Dubai crude in high demand.
Asian refiners are becoming increasingly concerned about the tightening supplies for the medium and heavy crude grade.
That is because many of them lack the flexibility to swiftly switch their refining systems to handle alternative light sweet crude grades that have low sulfur content. 
The market remains preoccupied with Iranian sanction waivers, which may be extended for another round of six months.
Given the tight oil market that has been further exacerbated by the sanctions on Venezuela, the second half of this year might experience further tightening.
The US is widely expected to continue extending the waivers for the key importing countries which are China, India, Korea and Japan. 
The a potential second round of waivers may not impact the market as much as last time in November 2018 when the price dropped by as much as $30 per barrel.
Helped by OPEC output cuts, the market has been stabilizing gradually even if not entirely recovering those early losses.
The current market appears too tight to be moved significantly by further waivers and should be able to absorb additional barrels — be they from Iran, Venezuela, Libya or the US.
Even with the last round of waivers, Iranian oil exports did not exceed 1.25 million barrels per day in February.

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


WEEKLY ENERGY RECAP: Keeping things in balance

Updated 08 December 2019

WEEKLY ENERGY RECAP: Keeping things in balance

  • The over-compliance will result in cuts of 1.7 million bpd

Brent crude rose above $64 per barrel after OPEC+ producers unanimously agreed to deepen output cuts by 503,000 barrels per day (bpd) to a total 1.7 million bpd till the end of the first quarter of 2020.

The breakdown is that OPEC producers are due to cut 372,000 bpd and non-OPEC producers to cut 131,000 bpd.

Current market dynamics led to this decision as oil price-positive news outweighed more bearish developments in the US-China trade narrative that has weighed on oil prices throughout the year, with US crude exports rising to a record 3.4 million bpd in October versus 3.1 million bpd in September.

OPEC November crude oil output levels at 29.8 million bpd show that producers were already overcomplying with its current 1.2 million bpd output cuts deal by around 400,000 bpd. 

The over-compliance will result in cuts of 1.7 million bpd, especially when Saudi Arabia continues to voluntarily cut more than its share.

This makes the agreed 1.7 million bpd output cuts pragmatic since it won’t taken any barrels out of the market.

It isn’t a matter of OPEC making room in the market for other additional supplies from non-OPEC sources, as OPEC barrels can’t be easily replaced.

Instead, this is about avoiding any oversupply that might damage the global supply-demand balance.

Saudi energy minister Prince Abdulaziz bin Salman has effectively kept his promise and managed to smoothly forge a consensus among OPEC and non-OPEC producers.

He has also successfully managed the 24-country coalition of OPEC+ including Russia in reaching an agreement.

Despite suggestions otherwise in recent coverage of the Vienna meeting, the deeper cuts announced on Friday have nothing to do with the Aramco IPO. Let’s remember this meeting was scheduled six months ago and the IPO has been in the works for much longer.

The Aramco share sale did not target a specific oil price. If that was a motivating factor it could easily have chosen another time.