Oil prices attempt another rally, but lose steam on dollar, supply concerns

A strengthening US dollar and renewed focus on bearish supply-side fundamentals took the bounce out of Brent, which at one point in early May was perched at the year’s high within sight of $68 a barrel. The decision by the Organisation of the Oil Exporting Countries (Opec) on June 5 to leave its production ceiling untouched – as predictable as it was – dragged the benchmark light sweet crude back to $62-per-barrel levels as the second week of June got under way.
The US dollar index – the value of the greenback against a basket of six currencies – climbed from a nadir of just over 93 mid-May to almost 97 on May 29, as improving US jobs-growth data through the month bolstered expectations of a Federal Reserve interest-rate increase in September. A stronger dollar makes commodities priced in dollars, such as oil, cheaper.
US commercial crude stocks declined steadily through May, but by the end of the month had chipped away a mere 13.5 million barrels from the 490.91 million barrels reported for the week ending April 24, the highest weekly total since the Energy Information Administration began tabulating the data in 1982.
Any impact on market sentiment from the crude draw-down was more than offset by the EIA reporting US crude production rising in the last two weeks of May, to touch a 25-year high of 9.586 million barrels per day (mb/d). The boost defied expectations to the contrary, based on a drop in North American rig count from its early October peak of 1,609 to 646 for the week ended May 29.
Reports of Opec overproducing its 30mb/d by nearly a million barrels per day and Russian Energy Minister Alexander Novak saying days before the Opec meeting that his country would maintain crude output around 10.54mb/d this year, stable from 2014, reinforced the oversupply scenario.
Conspicuous reminders from Iran that it would roll out an additional 500,000 barrels a day of crude within a month of sanctions being lifted, and 1mb/d within six to seven months from current levels, even if discounted somewhat by pragmatists, pointed to a possible worsening of the global oil overhang before it becomes better.
Iraq’s crude-oil exports vaulted over 3mb/d in April, for the first time since 1979, and were said to have climbed further in May, a trend that increasingly makes the advance of the Islamic State jihadist group in the Middle Eastern country seem like a non-event for the oil markets.
Against this backdrop, crimps such as wildfires in Canada’s eastern Alberta region closing down more than 230,000 barrels a day of heavy-sour-crude production capacity in the last few days of May, a Nigerian workers’ strike shutting in 100,000b/d of output for a week, or Libyan production languishing around 440,000b/d as a result of continued unrest, faded into the background.
While the first half of 2015 has been a story of global oil-demand growth trailing far behind the spurt in supply, expectations for the gap to close in the second semester have been firming. Both Opec and the EIA raised their 2015 demand-growth projections in their monthly reports in May, though the International Energy Agency, energy-policy adviser to the developed world, kept its estimates flat from April.
The average of the latest projections by Opec, the IEA and the EIA called for 1.16mb/d of global demand growth in 2015, an improvement from the corresponding January figure of a 1.05mb/d rise.
Lower oil prices are seen to be stimulating consumption across Asia, Europe and the United States, especially in transport fuels.
And while the jury is still out on the economic tailwinds from lower oil prices, Opec said in its May report: “Despite the slow start in some countries, world economic growth could strengthen further as the year progresses, leading to an improvement in crude oil demand in 2015.”
The EIA is forecasting US petrol consumption to rise by about 120,000b/d in 2015, compared with last year’s actual growth of 80,000b/d, as lower prices and employment growth outweigh increases in vehicle fleet efficiency.
China, the engine of global oil demand growth for the past decade, saw a 4.4-per-cent year-on-year rise in consumption over January-April this year at 10.48mb/d, according to Platts calculations, with petrol demand in April spiking to an all-time high of 2.71mb/d. The country is seeing a surge in petrol-guzzling sports-utility and multipurpose vehicles. SUVs now account for a quarter of the passenger vehicle fleet in China. Chinese demand for the rest of the year remains a wild card, though, given the uncertainty over its economic growth, speculation surrounding Beijing’s stimulus plans, and in general, its declining oil intensity.
Despite all the sanguine statements out of Vienna last week that the markets would rebalance in the second half of this year, from a current oversupply of around 2mb/d, the question remains whether a smart recovery in demand growth is more wishful thinking than a logical deduction.
As US production proves resilient through driving new cost efficiencies, Opec digs in its heels and opens the spigots wide, and more hopes are heaped on to a fragile demand increase because supply won’t respond, those looking beyond the day-to-day price swings know the new normal has arrived.
Opec secretary-general Abdalla el-Badri said June 5: “We have to adjust to the new reality. The market does not recognise $100 any more.”
We wonder if it will even remember $80.

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].