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Back to fundamentals after Hurricane Harvey, Kurdish referendum

Oct 13. 2017
Mriganka Jaipuriyar, associate editorial director, Asia
Mriganka Jaipuriyar, associate editorial director, Asia
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AT THE S&P Global Platts Asia Pacific Petroleum Conference in Singapore in late September, analysts vigorously debated if the oil market was nearing the end of the “lower for longer” phase and views were mixed. Global crude benchmark prices had rallied by almost 9 per cent in September offering oil producers a glimmer of hope that prices may have bottomed out.

But as the impact of the two key driving forces behind the rally – Hurricane Harvey and the Kurdish referendum – softens, prices are coming off and focus has returned to demand and supply, and fundamentals may not be bullish enough yet to push prices on a decidedly upward trajectory.

A price chart seen by Platts showed that the front-month ICE Brent crude futures contract rallied to a two-year high of US$59.49 per barrel on September 26, from a June 21 low of $44.35/b – the lowest level since November 14 last year.

Accordingly, Platts Dated Brent, the physical crude pricing benchmark for many Asia Pacific crude grades, also rose sharply. Platts Dated Brent averaged $56.05/b in September, up from $51.64/b in August and the highest monthly average since July 2015, when it was $56.54/b.

But the front-month Brent futures contract has recently pulled back from the peak as funds unwound some of their long positions amid profit-taking interest, while concerns on oversupply re-emerged in the market.

Hurricane Harvey, which slammed the US Gulf Coast in late August, took out pipelines and ports, and roughly 2.3 million b/d of refining capacity either via full shutdowns or lower operating rates. This led to a build in crude stocks but a sharp drawdown in product stocks, which sent prices rallying on anticipation that refiners will run at full hilt to recover lost output when they come back online, particularly with peak seasonal demand for diesel around the corner.

Prices also reacted to the possibility of a stoppage in crude flows of around 600,000 b/d from Kurdistan after it held a non-binding referendum on September 25. The referendum sparked an international outcry, a swift rebuke from Baghdad and some harsh rhetoric from Turkey, which threatened to “turn off the tap” of the oil pipeline sending Kurdistan-controlled crude to Ceyhan. That has not happened. Exports through the Kurdistan export pipeline into Turkey remain steady at nearly 600,000 b/d.

Though demand looks bullish – the International Energy Agency in its August monthly report lifted its estimate of 2017 oil-demand growth for a third month in a row to 1.6 million b/d after year-on-year growth of 2.3 million b/d in the second quarter, led by the US and Europe – persistence by US shale producers is likely to slow the pace of stock drawdowns.

At Asia Pacific Petroleum Conference, the International Energy Agency chief Opec oil analyst, Peg Mackey, said a “sharp decline of inventories next year looks unlikely”. US shale producers will play a critical role in bringing back supply as many have already made investments that will allow them to survive in a lower-priced environment, she said.

In fact, a panel of industry analysts agreed at the conference that though global crude prices are poised for an upswing through the end of 2017 as inventory levels tighten, growing supply is likely to outstrip demand next year, leading to market surpluses. Most agreed that the Opec/non-Opec coalition will need to extend its production cut agreement through all of 2018 for the market to balance. The IEA estimates non-Opec supply to grow by 700,000 b/d this year, but this is raised to 1.5 million b/d for 2018.

Though analysts may be calling for the Opec/non-Opec coalition to deepen and extend their production cuts, what exactly is the group thinking?

At a monitoring committee meeting in Vienna on September 22, the committee saw no need to recommend deeper cuts or any extension of the deal, saying it was still too early, but it added a wrinkle in its compliance calculations – monitoring crude exports.

While production would continue to be the primary metric by which compliance with the deal is evaluated, ministers on the monitoring committee said they would now incorporate export data to bolster trader confidence that the cuts are, in fact, lowering supplies to the market.

The discussion about exports comes as ministers are reportedly frustrated by the production cut agreement’s inability to stabilise prices in the $55-$60/b range that the coalition is targeting, despite strong overall compliance with quotas, which the committee pegged at 116 per cent for August.

Though most ministers agree that exports should be monitored, they also feel that it is a hard metric to measure accurately. But the committee made it clear that they are not thinking of an extension for now.

With global inventories shrinking, the oil market is “evidently well on its way to rebalancing”, Kuwaiti Oil Minister Essam al-Marzouq, who chairs the committee, said. The committee also said the Opec/non-Opec coalition would wait until closer to the March expiry of the current deal before deciding on any extension or deeper cuts, as conditions could change.

MRIGANKA JAIPURIYAR is associate editorial director, Asia & Middle East Energy News & Analysis.


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