Hint of optimism as Brent stabilises around $60, with downgrade in supply growth

Expectations of US production growth easing later this year gained ground through February as producers in that country continued to idle substantial numbers of oil rigs. The bullish sentiment found support from downgrades to 2015 non-Opec supply growth projections by the Organisation of the Petroleum Exporting Countries as well as the International Energy Agency (IEA).

In its February report, Opec slashed its estimate of non-Opec supply increases in 2015 by 400,000 barrels per day from its January report – implying more demand for its own crude. The IEA lowered its non-Opec supply growth estimate for the year by a more modest 150,000bpd from January to an average 800,000bpd.

It is worth bearing in mind that these projections are routinely revised as the months go by, and the recalibration is typically more pronounced in times of volatility and uncertainty.

Meanwhile, counterbalancing the sanguine view were the twin factors of a continuing supply overhang and growing stockpiles around the globe. Also, doubts remained over the so-called green shoots of oil-demand growth in response to low prices.

What stood out in February was also renewed divergence between the prices of Brent crude and US light sweet crude, commonly referred to as west Texas intermediate (WTI), with the latter pressured by burgeoning inventories at home. Front-month ICE Brent futures closed the month at a $13.39-per-barrel premium to NYMEX (New York Mercantile Exchange) light-sweet-crude futures, a contrast to the $2.45-per-barrel average spread in January.

The EIA reported 434.1 million barrels of crude stocks in the United States in the week ended February 20, the highest level since the agency began tracking the data in 1982.

Commercial crude inventories in the US continued to swell during February as production continued full throttle, while refinery runs eased, thanks to planned and unplanned outages.

February delivered another reminder that Opec intends to stand firm on its decision of last November to maintain its production target of 30 million barrels per day. A suggestion by Opec’s Nigerian president Diezani Alison-Madueke that she might call for an emergency meeting if prices continued to fall, in an interview with The Financial Times, published March 24, was quickly dismissed by a Persian Gulf delegate.

"It is unlikely that the Gulf countries will agree to an emergency Opec meeting," the source said, speaking on condition of anonymity. "To bring all the countries together is very difficult because the market is starting to stabilise and demand is starting to pick up."

Saudi Petroleum and Mineral Resources Minister Ali al-Naimi, in his first public comments since December, also chose to focus on growing demand.

"Markets are calm now ... demand is growing," Naimi told reporters on the sidelines of a conference in Jizan in the southwest of the country.

The global demand growth story – consumption rising enough to be able to run down the brimming stocks and to mop up more than a million barrels per day of excess supply – remains to be played out, just like expectations of US production paring back.

Overall oil consumption in China and India, the two main engines of demand growth in Asia, has been rising only moderately in recent months, but attention is starting to be focused on signs of petrol use jumping in response to lower prices in both countries.

An 18-per-cent year-on-year spike in Indian petrol sales in January created some excitement, though that needs to be taken in with the facts that the figure was flat from December and lower than the volume of sales registered in April and May 2014, before the crude-oil price crash.

Overall Chinese oil-demand growth this year is currently expected to settle around the 3-per-cent annual rise seen last year at best, translating to around 300,000bpd of incremental demand, as the country adjusts to a target of around 7 per cent economic growth this year versus the 7.4 per cent achieved in 2014. Official Chinese data for the first two months will only be available later in March, delayed by the long Lunar New Year break.

China petrol sales up

Research consultancy Energy Aspects estimates that overall January oil-products demand in China likely eased from December, but petrol sales "probably picked up to a record high 2.7 million barrels per day, as car purchases and [petrol] sales rose ahead of the Chinese New Year". The factors do not sound like a trend for the year.

Last July, average global demand forecasts from the IEA, the US Energy Information Administration and Opec suggested a year-on-year increase of 1.35 million barrels per day in 2015. Current forecasts from the three now average 1.0 million.

The uncertainty over both supply and demand this year, with a range of scenarios floating around, sets us for a period of volatility.

In the crude-oil futures markets, the speculative net length in ICE Brent futures grew by a multiple of five and a half times in the three weeks to February 24, according to data from the exchange. This contrasted with a 10-per-cent fall in speculative longs in NYMEX WTI futures just in the week to February 24.

Looking back to the tumultuous ride of 2014, the Bank for International Settlements in a report published on February 7 said the dynamics in the oil-futures markets likely changed dramatically in the second half of last year.

Highly leveraged producers – thanks to the increasing willingness of investors to lend against oil reserves and revenue in recent years – had continued pumping to generate cash even as prices went into a tailspin, delaying the supply-side response the market had expected, the bank said.

The implications of the lack of a supply-side response and the unconvincing demand growth story came to the fore again towards the end of February, as the six major Western powers intensified efforts to reach a framework deal with Iran over its nuclear programme.

The bears found their voice again, pointing to the additional barrels from Iran that could be unleashed on to an already oversupplied market, should the sanctions against the country be lifted in the next few months. But that prospect failed to push Brent below its $60 perch, indicating the Iran issue for now is just another element of uncertainty in a clueless market.

Vandana Hari is the Asia |editorial director at Platts, a |global energy, petrochemicals, metals and agriculture information provider and a division of McGraw Hill Financial. She can be |contacted at [email protected].