FRIDAY, March 29, 2024
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Oil: Further upside looks limited

Oil: Further upside looks limited

GLOBAL oil prices rose to their highest levels in three-and-a-half years in the aftermath of US President Donald Trump’s announcement that the US will pull out of the Iran nuclear deal. Further upside, however, looks limited.

Trump’s decision spooked the market, even though it was widely anticipated, because it comes at a time when the oil supply-demand balance is tightening.
Prices have been rising steadily since the start of 2018. The front-month ICE Brent crude futures contract has risen 18 per cent and is now firmly perched above the $77/barrel mark, and NYMEX crude futures has risen by 19 per cent to above $71/b. 
OECD commercial oil stocks that have been declining are now just 30 million barrels above their five-year average, according to the International Energy Agency. Stocks fell by 25.6 million barrels month on month in February to 2.84 billion barrels - the lowest level since April 2015, IEA said in its April monthly oil market report.
Add to this mix a pick-up in seasonal refinery activity over the May-August peak summer demand season and stocks are set to decline further.
Venezuela is another significant supply risk facing the market.
Venezuelan output, already in freefall, could be hit further if the US institutes sanctions in response to Venezuela’s upcoming May 20 presidential election that it has criticised as fraudulent.
Venezuela’s production of 1.41 million b/d in April was an 80,000 b/d fall from March and a 540,000 b/d plunge from its year-ago level, an S&P Global Platts survey showed.
According to sources in Venezuela’s oil ministry, the country is bracing for another 200,000 b/d drop by December, but some analysts expect a far greater decline.
Global oil demand, meanwhile, rose 1.9 million b/d in Q1 2018 compared with the same period the previous year, according to the US Energy Information Administration.
So, what does the US pulling out of the January 2016 Joint Comprehensive Plan of Action that was painstakingly negotiated by his predecessor really mean for oil supply?
Clarity has yet to emerge on the type of sanctions that will be imposed and the mode of implementation. Views are currently mixed and range from an immediate supply disruption of 200,000 b/d to 500,000 b/d in six months and up to 1 million b/d in one year.
Whatever the disruption, it is important to bear in mind that Opec and its non-Opec partners have 1.8 million b/d of production that they have deliberately turned off to support prices. This could gradually be brought back on stream to make up for any supply disruption.
Opec has also gone all out to reassure the market that it will do whatever is needed to maintain market stability.
Saudi Arabia is in “close contact” with Russia, the US and the UAE, which holds the rotating Opec presidency this year, “and will be connecting with other producers and major consumers over the next few days to ensure market stability,” Saudi energy minister Khalid al-Falih assured the market on May 9.
Saudi Arabia, Opec’s largest producer by far, holds some 2.18 million b/d of spare capacity, the IEA estimates. Other Opec members holding spare capacity according to the IEA include the UAE (310,000 b/d), Iraq (310,000 b/d) and Kuwait (240,000 b/d). In all, the IEA estimates that Opec has some 3.41 million b/d in spare capacity, defined as production that can be tapped within 90 days “and sustained for an extended period.”
US oil production, meanwhile, is raging on. The US EIA in its latest Short Term Energy Outlook released earlier this month said it expects US crude oil production to rise to 12 million b/d by November 2019. The EIA prediction would mean a staggering 2.65 million b/d increase from the 2017 average.
Closer to home, among Iran’s top Asian oil buyers, the Japanese and the South Koreans are expected to reduce their imports from the Persian Gulf producer. This is expected to benefit Chinese state-owned refiners, who could find themselves in a favorable position to buy abundant supply of Iranian crude oil at attractive prices
South Korea and Japan, two of the closest allies to the US in East Asia, would be keen to abide by the Trump administration's foreign policies as they require US support and influence in their quest to completely denuclearize North Korea and improve diplomatic and economic ties with Pyongyang this year.
In addition, the two giant Asian oil consumers were well positioned to adhere to sanctions that have been re-imposed by the Trump administration as they are more than capable of diversifying crude supply sources.
The US often struggles to influence China's trade relationship with Iran and Asia's biggest energy consumer may not hesitate to take advantage of the demand gap left by South Korea and Japan.
In the last seven years, China's crude imports from Iran have remained relatively stable in the 431,000-627,000 b/d range, data from the General Administration of Customs showed. In Q1, China's imports of Iranian crude rose 17.3% year on year to 658,000 b/d, making Iran the sixth-biggest supplier.

MRIGANKA JAIPURIYAR is Associate Editorial Director, Asia & Middle East Energy News & Analysis, S&P Global Platts
 

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