Brent crude rose as high as $64.32 a barrel, the day after OPEC and other crude producers agreed to extend output cuts until the end of 2018 to tighten global supplies and support prices.
INTERNATIONAL oil prices have staged a strong recovery since mid-August, with the ICE Brent futures contract gaining 10% and the WTI futures contract rising 8%. The rise in prices is not surprising as supply concerns have far outweighed concerns around the impact of an escalation in tariffs on global oil demand growth.
OPEC, in its August report, said that hiking tariffs could reduce 2019 oil demand by up to 350,000 b/d. S&P Global Platts Analytics, however, expects the impact of tariffs on demand to be negligible, and is maintaining its demand growth forecast at 1.8 million b/d in 2018 and 1.9 million b/d in 2019.
Supply concerns are, meanwhile, rising with US sanctions on Iran looming and global oil stocks dropping to below five-year average levels.
The International Energy Agency, in its August monthly oil report, said that OECD stocks fell 7.2 million barrels from June to 2.82 billion barrels as of end-July and were now 32 million barrels below the five-year average, marking another widening of the deficit.
Oil exports from Iran fell to their lowest level in seven months in August in the first concrete sign that the re-imposition of US sanctions in November was impacting buyer behaviour.
Total estimated exports from Iranian ports fell 17% on the month to 1.92 million b/d in August, according to data from S&P Global Platts trade flow software cFlow.
Exports to Asia slumped to 1.3 million b/d in August from 1.76 million b/d in July as flows to China, India and Japan all declined. China, which is expected to remain the biggest buyer of Iranian crude despite the sanctions, saw purchases fall by more than 200,000 b/d month on month. Similarly, exports to India in August fell by more than 250,000 b/d.
There have been questions around India -- the second-largest buyer of Iranian crude -- which is under pressure from the US government to cut its reliance on Iran’s oil. This occurs as Indian refiners are dramatically stepping up their US crude purchases as questions loom over future purchases from Iran and the trade war heats up between Beijing and Washington.
Platts Analytics expects 1.4 million b/d of Iranian oil to be removed from the market by November. This, coupled with limited spare capacity and plateauing production from top producers Saudi Arabia and Russia, is expected to put a firm floor under oil prices in the months ahead.
OPEC crude output in July was just 435,000 b/d above its May level, according to the latest Platts OPEC production survey, with a bulk of the increase coming from Saudi Arabia, the UAE and Iraq.
Russia boosted its production by about 240,000 b/d over the same period. This leaves the OPEC/non-OPEC coalition only around two-thirds of the way to the 1 million b/d increase above May levels agreed at its June 23 meeting in Vienna.
The six-country Joint Ministerial Monitoring Committee, which is chaired by Saudi Arabiaalex’s energy minister Khalid al-Falih and includes ministers from Russia, Kuwait, Venezuela, Algeria and Oman, is to meet twice this month -- on September 11 and 23 -- to assess market conditions and come up with the next steps.
But OPEC’s quest to balance oil markets is about to get murkier amid Venezuela’s ongoing economic crisis and as sanctions on Iran close in. OPEC’s options for the second half of the year are limited.
Pump too much too quickly and it could flood the market just as tepid economic growth in Asia and intensifying trade wars weigh on global consumption. Keep too firm a grip on the taps, and the market could over-tighten from the impact of US sanctions on Iran and Venezuela’s worsening troubles.
Meanwhile, any misjudgment could widen the cracks among its already politically fractured membership.
Iran, which has threatened to block regional exports if its market share is threatened, has accused Saudi Arabia and its Gulf allies of violating OPEC statutes in pumping above their allocations.
Saudi Arabia’s state-owned oil company Saudi Aramco recently cut the official selling price of its flagship Arab Light crude loading in September to all markets, except the US. This could be a signal that it is gearing up for a more competitive market, particularly in Asia. Iran promptly followed suit, with the National Iranian Oil Company aggressively slashing its September OSPs across all grades.
A collision over strategy between Saudi Arabia and Iran now seems inevitable.
Mriganka Jaipuriyar, Associate Editorial Director, Asia energy news.
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