Oversupply to Haunt Markets Unabatedly
Syed Rashid Husain
CONFLICTING push and pulls kept swaying the crude oil markets the entire last week, one way or the other. Oscillating within a narrow price band, markets were seen reacting to virtually every news concerning the overall energy outlook.
Markets remained focused on two major developments; the level of US crude inventory and the possibility of an output freeze agreement in Algiers later this month.
After registering a significant rise earlier on the news of more than expected drawdown in the US crude inventories, market prices fell on Friday. Stakeholders conceded that a tropical storm was behind the unexpected slump in US crude inventories, underlining that the hefty drawdown did not indicate any real demand turnaround in the world’s largest crude oil market.
On Wednesday, US inventory data had shown a surprisingly large drawdown in crude stocks. As per the EIA, US crude inventories plunged by 14.5 million barrels – to 511.6 million barrels – for the week ending on September 2. This was the biggest weekly drop in stockpiles since January 1999, according to the US Energy Information Administration.
Consequent to this, oil prices surged on Thursday.
Yet, the correction was not far behind, as most realized that the significantly large drawdown was not the result of any demand strength. Tropical Storm Hermine, which threatened the Gulf Coast refining region last week, scuttled some US oil production and limited imports and shipping. Consequently, the Gulf Coast crude imports hit the lowest levels on record last week, data showed.
“The drop in crude stocks was caused by the decline in imports after the storm delayed ships going into Louisiana and Texas,” James Williams, of WTRG Economics in Arkansas, was quoted as saying.
And what really dampened the bullish market sentiments was the expectation that the market could see a significantly large inventory build-up over the next few days. “Next week, crude stocks will likely rise dramatically as those ships offload this week,” Williams added.
Indeed, key US oil spreads remained little changed after the EIA report, Tariq Zahir, spreads trader at Tyche Capital in New York, told Reuters. The “drawdown may be viewed as a one-off situation.”
In the meantime, the ongoing buzz on an OPEC output freeze deal has also kept the crude markets on edge. Markets continued to be fed with conflicting reports – contributing to the volatility. Would Iran be ready to freeze output remained a big if? Behind the scene, diplomatic flurry was evident when OPEC Secretary General called on the Iranian Oil Minister. An effort seemed on to bring the rather diverging parties within and outside the OPEC to converge on the level of output freeze.
And thus when at the beginning of the last week, Riyadh and Moscow announced the agreement to consult and coordinate their moves on the energy chess boards, markets took it as a positive sign. Many felt, the two big wigs of the energy world were prepared for an output deal in Algiers. After staying in the negative for a couple of days, markets were bound to react positively to it, and so they did. Crude prices jumped once the understanding between the two to coordinate and cooperate in a bid to stabilize the oil markets was announced.
But this too proved to be a phase in passing. Anthony Grisanti, founder, and president of GRZ Energy felt it was a non-event -and – for a host of reasons. “What Russia and OPEC have agreed is to form a working committee to study the issue – in other words, they’ve agreed to talk more. And if there was a freeze – the world’s third largest oil producer (the US) would not be a part of it. A freeze would put OPEC production at about 2 million barrels above its quota, (while) the US is still producing over 8 million barrels per day, (and) Libya and Iraq are producing more and the list goes on,” he opined in a CNBC commentary.
Oil prices have also been drawing support from the data that showed Chinese crude imports surging in August by nearly 25 percent from a year ago and to the second-highest ever. The dramatic increase was attributed to independent refiners taking advantage of low oil prices before import quotas expire in December and not the fundamentals. And that remains the underlining issue. Fundamentals continue to be deceptive, weak and faltering. Ominous clouds could be seen hovering.
Demand remains weak. With the US, the economy growing at below 2 percent, compromised growth levels in the European Union and the outlook for China continuing to be weaker, the question remains from where will the demand come from?
While in the meantime, supply remains robust.
Amid increases by Iran, Iraq, and Kuwait, OPEC output rose to a record 33.69 million barrels a day in August, a Bloomberg survey showed last week. Iran seems ready to raise output to 4 million barrels a day over the next two to three months whereas, as per Iraq state oil marketing company, Iraq’s production rose to 4.64 million barrels a day in August.
Saudi output is also around10.69 million bpd, whereas, Russian average oil production was close to 11 million bpd in the period of Sept. 1-7. Reports of possible output resumption from violence-plagued Nigeria and Libya is also contributing to the softening of the markets. And thus any output freeze, even if agreed upon, may not be of much help, one could safely deduce.
In the midst of all these, the recent price blip has definitely helped the shale producers in the US, indicating additional US domestic stream in near future. US drillers last week added oil rigs for a 10th week in the past 11, Baker Hughes rig count report said. This was the longest streak without rig cuts since 2011, analysts are pointing out.
And in the meantime, Morgan Stanley is underlining that there are now risks that the crude market might not rebalance until late 2017, or even 2018. “An oil recovery has been 6-12 months away in the minds of investors since late 2014, but “unforeseen” events have led to consistent delays. Once again, we see an increasing probability for several bearish developments to come together, which could push off rebalancing (seasonally-adjusted demand exceeding supply) to late 2017 or 2018.”
Markets thus continue to be in flux. Ominous clouds could definitely be seen on the horizon. The immediate future remains hazy. ‘As long as the status quo of oversupply persists, oil prices will trade in the $35 to $55 per barrel range (that) they’ve been stuck in for over two years,” underlined Adam Longson, head of energy commodity research at Morgan.
One cannot contest. Markets are under pressure. And Longson has a point, one can’t help conceding.