Oil market neutral to bearish in near term

 The UK economy plays a very small role in the global oil market, with the country accounting for about 1 per cent of global oil supply and 1.6 per cent of demand.
A stronger dollar, however, makes oil imports more expensive for holders of other currencies and is generally seen as bearish for demand. The US Dollar Index hit a three-month high of 96.7 in the aftermath of the UK’s decision to leave the European Union.

Crude futures
A rally in crude futures that began in February stalled this month under the weight of a rising dollar, pushing prompt contracts for NYMEX crude and ICE Brent back below US$50 (Bt1,760) per barrel.
Brexit also raised the degree of volatility in the futures market. Front-month NYMEX crude volatility hovered around 30 per cent, up from less than 20 per cent earlier this month, according to data supplier GlobalView. That figure was above 90 per cent in February.
But the market has now digested the Brexit vote and focus is returning to supply-demand fundamentals.
With Nigerian and Canadian oil production gradually returning and gasoline stocks at levels sufficient to meet summer demand, the market is looking more neutral to bearish in the near term.
On the supply side, what market observers are keenly watching for now is to see if US crude production ticks higher with crude prices having roughly doubled since February to around $50/barrel.
Latest data from the US Energy Information Administration (EIA) showed that US crude production slipped by 55,000 barrels per day to 8.622 million b/d in the week ended June 24, from 8.677 million b/d in the previous week. Production has come off 123,000b/d since early June.
According to Keisuke Sadamori, director of energy markets and security at the International Energy Agency (IEA), the rebound in crude futures to around $50 per barrel led to an increase in rig counts but has not been sufficient to halt overall decline in US shale oil production.

US shale
In the mid- to long term, US shale production would need oil to be at more than $60/barrel to trigger an increase in production and sustain it, Sadamori told Platts recently.
On the demand side, the market is paying close attention to US gasoline data as the summer driving season gets under way.
Latest data from the EIA showed that gasoline supplied – a proxy for implied demand – remained at elevated levels.
But this demand is being met with robust US gasoline production and high stocks.
However, overall global oil demand looks strong. The International Energy Agency in June maintained a return to balance in world oil markets for the second half of the year, increasing its estimate of annual demand growth to 1.3 million b/d this year and next.
The agency increased its estimate of global growth this year, citing a stronger stimulus as a result of low oil prices than previously realised.
Abandoning a projection of 1.2 million b/d growth, it said statistical revisions showed demand in the first quarter had grown by 1.6 million b/d on the year, led by Asia.
So while on the supply side, the outages of the last few months appear to be easing out, on the demand side, it remains to be seen if Brexit will have wider implications on the global economy and global oil demand growth and exert downward pressure on oil prices.

Mriganka Jaipuriyaris is associate editorial director, Asia & Middle East Oil News & Analysis, S&P Global Platts.