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Oil Price Rally Hits a Snag: Two Factors to Watch

Posted by Ben Brockwell on Jul 17, 2018 12:04:04 PM
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   The two-week-long run up in bulk U.S. gasoline prices in summer 2018 hit a mid-July roadblock when oil prices tumbled.

   The sudden reversal in prices came when a couple of reports emerged hinting that supplies were back on the rise and that demand could take a hit in response to higher prices.

    If supplies do indeed start to outstrip demand and commence building again, that would provide sufficient impetus to halt the one-way lift in oil prices, even as some investment houses predict $82/bbl Brent crude before the summer ends, with $90 and $100/bbl crude prices mentioned in passing.

   Here are two factors OPIS noted as impacting the halt. 

OPEC Is First Factor Influencing Lower Oil Prices

     OPEC’s report was the first that caught the market’s attention. The figures detailing OPEC crude oil output revealed that Saudi Arabia, the group’s largest producer, lifted June production to 10.42 million b/d, and increase of 405,000 b/d from May. That signaled the market that Saudi Arabia, perhaps reacting to President Trump’s request for more oil to calm prices or its own conviction that it wanted a balanced market, has responded quickly to tight market supplies by hiking oil production.

   The Saudi figure of 10.42 million b/d of production puts the kingdom’s output back to 2016 average levels, a time when global oil supplies were generally expanding.

   The 405,0000 b/d of extra output also makes up for the 47,500 b/d of output lost from May to June from Venezuela and the 254,300 b/d lost from Libya, as well as the 88,300 b/d lost from Angola.

   Total OPEC production advanced 173,400 b/d in June versus May, with total production in May approaching average production levels from the first quarter but still lagging by 300,000 b/d to 500,000 b/d the lofty average numbers from 2016 and 2017.

Here are some more takeaways: 

  •    The report is enough to make some think that petroleum supply imbalances may start to change in favor of more supply.
  •     OPEC also thinks supplies from its non-OPEC competition in 2018 will be 2 million b/d higher than 2017.
  •    OPEC did not change its oil demand forecast, keeping its growth expectations for 2018 to 1.65 million b/d and 1.45 million b/d for 2019.
  •    Looking to 2019, OPEC expects oil demand to moderate and says it “will continue to have sufficient supply to support oil market stability.”

EIA Adds to the Oil Price Pressure

   The U.S. Energy Information Administration’s (EIA) Short-Term Outlook for July also calmed the market. EIA predicted that West Texas crude prices will average $73/bbl in 2018 before dropping to $69/bbl in 2019.

   EIA’s forecast of global liquid fuels balances indicates a looser oil market in the second half of 2018 and through the end of 2019 compared with tight market conditions that have prevailed in 2017 and the front-half of 2018.

   “Although global petroleum and other liquid fuels inventories declined by an average of 500,000 barrels per day in 2017, EIA expects inventories to be relatively unchanged in 2018 and to increase 600,000 b/d in 2019,” its report stated.

A few more notes: 

  •    EIA’s inventory builds for 2019 are predicated on liquid fuels production growth rising in the U.S., Brazil, Canada and Russia.
  •    These countries will collectively provide 2.2 million b/d out of the 2.4 million b/d of total supply growth in 2019.
  •     EIA’s projection of non-OPEC supply growth is a tad higher than OPEC’s forecast. 

EIA Builds Itself an “Out”

   There is always a caveat that comes with oil market price, supply and balance predictions and the out EIA provides for itself is one worth paying attention to.

   Inventory levels in the OECD developed economies that have fallen below the five-year (2013-2017) average and a forecast of low spare capacity – spare capacity made lower each time Saudi Arabia hikes production – “create conditions for possible price increases if additional supply disruptions occur or if forecast supply growth does not materialize,” EIA warns.

   EIA expects OPEC spare capacity to average just 1.3 million b/d in 2019 after averaging 1.7 million b/d this year. That is below the 2008 to 2017 average of 2.3 million b/d of extra capacity to offset unexpected supply disruptions.

   All of this would point to a market where gasoline, jet fuel, diesel and crude oil prices top out in the second half of 2018 as some of the extra oil works its way into the market.

   But given the expected strong global economies – OPEC forecasts a global GDP expansion of 3.6% in 2018 – along with receding spare capacity and generally strong demand, it may be unreasonable to predict market prices will fall back too severely.

   Find out more in the OPIS Outlook Forecast Mid-Year Review. In addition to a full discussion of geopolitical forces on the oil market and an in-depth look at U.S. supply and demand, we’ll cover:

  • How the announcements made at the June 22 OPEC meeting will shape the fortunes of oil prices for the remainder of 2018
  • The effect of RINs market volatility on RBOB gasoline futures prices
  • The major headlines that are shaping gasoline and diesel prices this year.

Click below to get the OPIS Outlook Forecast Mid-Year Review.

 

Download your copy now!

 

Tags: Spot Market, Rack Market, Retail Market

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