WEEKLY ENERGY RECAP: OPEC and IEA fail to factor in global oil supply threat

The logo of the Organization of the Petroleum Exporting Countries (OPEC) sits outside its headquarters in Vienna, Austria. (Reuters/File)
Updated 13 October 2019

WEEKLY ENERGY RECAP: OPEC and IEA fail to factor in global oil supply threat

  • Both OPEC and the International Energy Agency (IEA) see lots of oil supplies through 2020, each flagging similarly pessimistic oil demand growth outlook

Oil prices recorded their first weekly gain in two weeks, driven higher by unrest in Iraq and Ecuador, as well as by optimism over talks between the US and China aimed at ending their trade war. 

The attack on an Iranian oil tanker off the coast of Jeddah overshadowed the latest hints from OPEC about the possibility of making deeper output cuts.

Brent crude finished the week at $60.51 per barrel, while the US WTI measure also advanced to $54.70 per barrel.

Supply disruptions originating from US sanctions on Iran and Venezuela continued to make for a tight spot market even as concerns over slower global growth and the US-China trade war put downward pressure on the market for future oil deliveries.

Both OPEC and the International Energy Agency (IEA) see lots of oil supplies through 2020, each flagging similarly pessimistic oil demand growth outlook that may have neglected the fragility of global spare production capacity.

In their monthly reports, neither OPEC or the IEA factored in concerns about global oil supply threats — even if Saudi Arabia took just 12 days to restore output to pre-attack levels without necessitating the suspension of exports.

The speed and efficiency of the Saudi response may have lulled the market into a false sense of security because if such attacks happen elsewhere, the story could have been very different — with serious supply outages sending the oil price rocketing.

OPEC and the IEA have pumped pessimism into the market that is helping to put downward pressure on oil prices. 

Separately, the US Energy Information Administration (EIA), sharply lowered its oil price outlook as it sees weak oil demand growth more than offsetting the higher risks of supply disruptions after the recent attacks.

It expects Brent to average $63.37 per barrel in 2019, and $59.93 per barrel in 2020. It sees WTI averaging $56.26 per barrel in 2019 and $54.43 per barrel in 2020. 

The EIA forecast US oil production to average 12.26 million bpd in 2019, and 13.17 million bpd in 2020.

However there may be a mismatch here between its expectations of a lower oil price and higher US output because the Permian producers require higher prices than those forecast to sustain capital expenditure.

Hence, such lower oil prices forecast for 2019 and 2020 should see oil production growth trending lower as budgets are squeezed.

S&P Platts Global reported US oil drilling was 19.8 percent lower than a year earlier, while the US oil and gas rig count has also been declining since the end of last year — dipping to 931 lately after a high of 1,233 in mid-November 2018.

Such numbers raise questions over the sustainability of the US shale oil output growth without a corresponding hike in oil prices.


Virus fears push stocks to 2-week low

Updated 7 min 17 sec ago

Virus fears push stocks to 2-week low

  • China has confirmed more than 2,700 cases of the new virus, with 81 deaths. Most have been in the central city of Wuhan

LONDON: World shares slipped to their lowest in two weeks on Monday as worries grew about the economic impact of China’s spreading coronavirus, with demand spiking for safe haven assets such as Japanese yen and Treasury notes.

The death toll from the coronavirus outbreak in China rose to 81 and the virus spread to more than 10 countries, including France, Japan and the US. Some health experts questioned whether China can contain the epidemic.

By midday in London, MSCI’s All-Country World Index, which tracks shares across 47 countries, was down 0.6 percent to its lowest since Jan. 9.

In Europe, stock markets slumped at the start of trading, tracking their counterparts in Asia. The pan-European STOXX 600 index fell 2 percent to its lowest level since Jan. 6, and the Euro Stoxx 50 volatility index jumped to its highest level since December.

“The coronavirus is an economic and financial shock. The extent of that shock still needs to be assessed, but it could provide the spark for an arguably long-overdue adjustment in the capital markets,” Marc Chandler, chief market strategist at Bannockburn Securities, told clients.

In Asia, Japan’s Nikkei average slid 2 percent, the biggest one-day fall in five months. A Tokyo-listed China proxy, ChinaAMC CSI 300 index ETF, fell 2.2 percent. Many markets in Asia were closed for the Lunar New Year holiday.

US S&P 500 mini futures were last down 1.36 percent, suggesting an open in the red on Wall Street later. The VIX volatility index, also known as Wall Street’s “fear gauge,” hit its highest levels since October.

The ability of the coronavirus to spread is getting stronger and infections could continue to rise, China’s National Health Commission said on Sunday. More than 2,800 people globally have been infected.

China announced it will extend the week-long new year holiday by three days to Feb. 2 and schools will return from their break later than usual. Chinese-ruled Hong Kong said it would ban entry to people who have visited Hubei province in the past 14 days.

“While the continued spread of the virus is concerning, we were expecting that the outbreak could worsen before being brought under control,” UBS strategists wrote in a research note, adding that they expected impact on the region’s economy and risk assets to be short-lived.

“Sentiment may remain depressed in the near term, especially for those sectors most impacted, however we retain a positive outlook for emerging market stocks, including a preference for China equities within our Asia portfolios.”

MSCI’s broadest index of Asia-Pacific shares outside Japan was off 0.45 percent, although markets in China, Hong Kong, Taiwan, South Korea, Singapore and Australia were closed on Monday.

All three major Wall Street indexes closed sharply lower on Friday, with the S&P 500 seeing its biggest one-day percentage drop in over three months.

The S&P 500 lost 0.9 percent, the Dow Jones Industrial Average 0.6 percent and the Nasdaq Composite 0.9 percent. The US Centers for Disease Control and Prevention has confirmed five case of the virus on US soil.

US Treasury prices advanced, pushing down yields. The benchmark 10-year note’s yield fell to a three-and-half-month trough of 1.6030 percent. It last traded at 1.6321 percent.

Elsewhere in bonds, the Italian 10-year yield fell to a three-month low Monday after right-wing leader Matteo Salvini failed in his bid to overturn decades of leftist rule in the northern region of Emilia-Romagna on Sunday, bringing some relief to the government.

In the currency market, the Japanese yen strengthened as much as 0.5 percent to 108.73 yen per dollar, a two-and-a-half-week high.

The euro last traded unchanged to the dollar.

China’s yuan tumbled to a 2020 low, and commodity-linked currencies such as the Australian dollar fell, as growing fears about the spread of a coronavirus from China pushed investors into safe assets.

The coronavirus outbreak also pressured oil and other commodity prices.

US West Texas Intermediate crude futures plummeted 2.69 percent to a three-and-a-half-month low of $52.13. Brent shed more than 3 percent to a three-month low of $58.50 per barrel.

Spot gold rose as much as 1.0% to $1,585.80 per ounce, the highest level since Jan. 8, as the coronavirus outbreak pushed up demand for the safe-haven metal.