Supply outages push equilibrium farther down the road
At the beginning of May, this column said the price of crude oil looked tentative on its new perch in the mid-US$40s per barrel because market fundamentals remained weak. In the weeks that followed, both Brent as well as NYMEX crude in the US rose further
As much as that raises the hopes of beleaguered producers around the world and enabled the Organisation of the Petroleum Exporting Countries (Opec) to feign unity and a sense of purpose without an ideology at its June 2 meeting in Vienna, the latest strength in oil prices cannot be taken for granted.
It could sustain for several weeks, without doubt, depending on how long the drop in production in Canada, Venezuela, Nigeria, Iraq and Libya lasts, but it would be risky to assume this is the oil market’s new normal.
A knee-jerk bullish response to the rash of outages in recent weeks – estimated to have removed close to 3 million barrels a day (mmbd) of oil supply from the global market – by those looking at crude-oil futures from a day-to-day or intra-day perspective is understandable.
But the outages are all different in nature and by definition going to vary in duration. That means the interrupted supply is returning gradually to the market, even if at an uncertain pace.
The wildfires that knocked out about 1.27mmbd or a third of Canadian crude-oil production from May 1 have been gradually moving east, with companies in the western oil-sands province of Alberta starting to resume production around the end of May and early June.
Nigerian output, which declined by around 800,000 barrels a day (bpd) as a result of renewed militancy in the oil-rich Niger Delta, is expected to ramp up to its 2.2mmbd full potential by the end of August, Oil Minister Emmanuel Kachikwu said on June 2.
In Iraq, power-supply interruptions affected 50,000-70,000bpd of flows from the country’s south, with the Kirkuk field in the north pumping about 170,000bpd less. But variations of 100,000-200,000bpd in Iraqi output, which overall has risen to 4.5mmbd, are routine. Besides, the producer was due to make up the estimated 164,000bpd drop in May exports versus April by loading additional volumes in June.
Libya had shored up crude-oil output to around 300,000bpd by the end of May from a trough below 200,000bpd earlier in the month. The North African producer, which remains in the grip of political uncertainty with two rival governments claiming legitimacy, now hopes to boost production to 700,000bpd by the end of this year. That is as likely to transpire as continuing political discord or even Islamic State militants capturing oil facilities in Libya leaving output languishing at current levels.
In contrast, Venezuelan crude-oil production, having consistently slipped over recent months to around 2.3mmbd, is at risk of continuing downhill, amid severe power-supply problems and retreating oil service providers, who have not been paid their dues.
The other reliable output drop is from the US, which is on course to pump an average 8.6mmbd this year, versus 9.4mmbd in 2015, according to the Energy Information Administration.
Commercial oil-inventory draw-downs in the US through the second half of May, accompanied by refined product stock declines through much of the month, also helped fuel the market’s bullish sentiment, ignoring the fact that crude oil, petrol and distillate inventories in the country are higher than 2015 levels and way above the five-year average.
Meanwhile, expectations for a second US interest-rate increase in June or July spurred the dollar up, from 92.63 against a basket of currencies as measured by the USD Index at the start of May to 95.89 at the end of the month. The dollar’s strength has an inverse relationship with oil prices.
On the bear side of the scenario, Iran has ramped up its crude-oil production to 3.8mmbd, Oil Minister Bijan Zanganeh said on June 2, which suggests an increment of 900,000bpd from the 2.9mmbd it pumped in January, as per S&P Global Platts’ survey. The country is targeting 4mmbd by year-end.
The International Energy Agency in its May report projected a remarkable turnaround of just 200,000bpd of growth in global oil stocks in the second half of this year, dramatically reduced from the 1.3mmbd estimated for the first semester, though the math behind the numbers is not clear.
As discussed above, most of the current slew of major supply outages should gradually ease up in the coming months, while economic doldrums round the globe present a continued downside risk to oil demand growth, and Opec appears to have firmly put its production quotas-and-curbs policy behind it in search for a new ideology.
The bottom line is that this time around, the oil market’s rebalancing is in uncharted territory. The course has been rendered unpredictable by factors including US shale-industry economics that are yet to be fully understood, the promise of major supply growth from post-sanctions Iran against several hurdles, Opec renouncing its historical role in search of a new identity, and cheaper oil failing to be a shot in the arm for the global economy as was expected.
The oil market’s tango has only just begun.
Vandana Hari is Asia editorial director, S&P Global Platts and Research Scholar, S&P Global Institute.
