Is The Oil Rally Here To Stay?
Is the gloss going off rebounding oil? It seems to be the case as US oil production hits an all time high of well over 9.6 million barrels a day and prices continue easing.
Energy shares are popular, oil and gas companies have stepped up spending and exploration, hiring more staff thanks to global prices which have spent most of this year slowing regaining ground lost in the great slide of 2014 to 2016.
Of course, helping the recovery has been the 1.8 million barrels a day production cap from OPEC and other producers, such as Russia.
In fact oil prices burst through the $US60 a barrel level a few weeks ago for the key global marker crude, Brent and topped $US64 a barrel, while US crude futures topped $US57 a barrel.
But now there seems to be a slowly slide back on the cards. Brent is now back around $US61.85 and WTI is around $US55.33 a barrel on Wednesday, down from the most recent high of $US57.21 hit on November 6.
Driving this seems to be market unease that the long rise in prices will bring more oil onto the market. That’s certainly been the case in the US where the latest production figures for last week overnight Wednesday showed record daily output for the US - nearly 9.65 million barrels a day. US oil stocks also rose by around 2 million barrels as well to 459 million barrels
The price rise making markets uncomfortable, especially with rising tensions in and around Saudi Arabia.
So is oil at or above $US60 a barrel now too much of a good thing? OPEC doesn’t thing so and this week forecast a falling oversupply and rising demand for oil in 2019.
Now a harder headed bunch of analysts at the International Energy Agency (IEA) reckons the rebound in prices and the production cap might be preparing the ground for a slide in prices next year.
So on Tuesday the IEA trimmed lowered its oil demand forecast for this year and next, saying the rally in prices since June was likely to crimp consumption. That saw prices sag and that continued Wednesday.
And along with the price rise, growth in global oil demand could rise increase more slowly over the coming (northern winter) months, as warmer temperatures cut consumption.
The IEA warned that non OPEC producers (mainly the US) could double this year’s extra 700,000 barrels a day of supply to around 1.4 million barrels a day next year, which would fill most of the estimated rise in demand that the production cap from OPEC, Russia and others will cut from global output.
With OPEC and other countries involved in the cap meeting on November 30 and likely to extend the deal until the end of 2018, the IEA change is a warning that the next year could be much tougher than expected.
In its monthly oil market report, the Paris-based agency lowered its 2018 demand growth estimate by almost 200,000 barrels a day and cautioned that supplies outside Opec are expected to increase rapidly next year, potentially reversing crude’s move above $US60 a barrel.
“The reality is that even after some modest reductions to growth, non-OPEC production will follow this year’s 0.7 mb/d growth with 1.4 mb/d of additional production in 2018 and next year’s demand growth will struggle to match this. “This is why, absent any geopolitical premium, we may not have seen a ‘new normal’ for oil prices.”
Analysts say ‘geopolitical problem; refers to problems involving North Korea, the rising tensions in the Gulf between the Saudis and its neighbours plus the internal purge among the royal family and well connected businesses and the rising chances of a debt default by struggling Venezuela.
The IEA’s report comes just over two weeks before Opec meets with other big producers to decide whether to extend their 1.8m barrel a day production cuts beyond March 2018. The group cautioned that while oil markets have tightened this year the balance between supply and demand could weaken, especially in the first half of next year.
The IEA said: “Using a scenario whereby current levels of Opec production are maintained, the oil market faces a difficult challenge in the first quarter of 2018 with supply expected to exceed demand by 0.6 mb/d followed by another, smaller, surplus of 0.2 mb/d in the second quarter of 2018.”
The IEA cut its oil demand forecast by 100,000 barrels per day (bpd) for this year and next, to an estimated increase in demand 1.5 million bpd in 2017 and 200,000 barrels da day to a rise of 1.3 million bpd in 2018.
The IEA noted that output by OPEC fell 830,000 bpd year-on-year in October, although demand for the group’s crude is expected to fall to 32.6 million bpd in the fourth quarter of this year and to 32.0 million bpd in the first quarter of 2018.
But the biggest threat to market balances, aside from a tempering in demand, is the growth in supply from non-OPEC nations such as the US.
“Even after some modest reductions to growth, non-OPEC production will follow this year’s 700,000-bpd growth with 1.4 million bpd of additional production in 2018 and next year’s demand growth will struggle to match this,” the IEA said.
“This is why, absent any geopolitical premium, we may not have seen a ‘new normal’ for oil prices,” The IEA said.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.