Why oil could soon soar again

The oil price is up to its usual tricks again – it’s all over the place.

The oil price is up to its usual tricks again – it’s all over the place.

That’s no surprise. News flow in the sector continues to be very variable. You could be excused for being very puzzled by all the conflicting talk and counter rumours.

But the cost of crude affects us all in some way or another, from fuel for the car (unless you’ve got one of those snazzy electric models) to your oil-fired central heating system to the price of anything plastic.

And oil prices could be about to go sky high…

What’s the latest?

Whenever you look at oil, there’s always another announcement just out.

In Tuesday it was the turn of US crude inventories. They fell by 8.1m barrels last week, said the American Petroleum Institute (API). But according to government data, the weekly drop in crude inventories was 7.6m barrels. At least that was a bigger decline than forecast, as industry analysts had expected a 2.9m barrel fall.

Gasoline (i.e. petrol) stocks fell by 1.6m barrels versus analysts’ expectations in a survey conducted by Reuters of a 1.1m barrel gain.

Against this, US oil production grew by 59,000 barrels a day (b/d) to nearly 9.4m b/d. Meanwhile, the world’s biggest oil exporter Saudi Arabia told OPEC that it pumped more than 10m b/d in June, according to Bloomberg, lifting its output from 9.88m b/d in May. That was the first time it had exceeded the 10.058m b/d limit previously agree in a deal between OPEC and other major suppliers including Russia.

If you’re confused about what this all means, I don’t blame you? So am I.

But the key point here is that the above data are just statistical ‘noise’. To get a feel for where the oil price is heading, we need to look at the bigger picture.

As I wrote about four months ago: https://www.dailyreckoning.co.uk/oil-energy/is-the-oil-rally-over/, the oil price – along with all other markets – depends on how the balance between supply and demand is expected to develop over the coming months.

Again, that’s not so easy to work out.

“Oil predictions are about as common and consistent as weather forecasts”, says Tom Terrarosa for The Street. “Every day an analyst is making one, and often it is in direct contrast to what that analyst or another said about the commodity the day before.”

Yet global demand for crude has consistently increased since the mid-1980s. And despite a few uncertainties over the world’s economic growth outlook along with rising competition from renewable energy sources, it looks set to continue climbing for the foreseeable future.

As for supply, there’s been a glut for three years. Libya and Nigeria have restored around 400,000 b/d of earlier-disrupted output. Long-term projects in Canada and Brazil are set to add production this year. But one of the key factors has been US shale oil production. And America’s Energy Information Administration has just forecast that the country’s crude output next year will be a record 9.9m b/d.

Is that a worry for oil bulls? In fact, no it isn’t. It’s a smaller increase than was previously forecast by the EIA.

Over to OPEC: in May, the Organisation of the Petroleum Exporting Countries said that it would extend its previously–announced 1.8m b/d oil output cuts by nine months to March 2018. And also this week, Saudi Arabia announced plans to cut its August crude exports by 600,000 b/d, according to a Reuters report.

Next month’s projected reduction would be the biggest since the start of 2017 and would shrink Saudi exports to their lowest monthly level this year.

“The drop in US crude stocks will raise hopes that a long-awaited market rebalancing is under way”, says CNBC’s Tom DiChristopher. “The lower 2018 forecast of 9.9m barrels per day will ease concerns that the OPEC-led supply cut will lead to a flood of competing US shale supplies, swamping the OPEC effort.”

“We remain very optimistic … (about) helping the market to rebalance itself,” says OPEC Secretary-General Mohammad Barkindo.

Thus far, these estimates look potentially helpful for future crude prices. Once again, though, they are just forecasts. There’s a risk they could prove wrong. Or they could turn out to be more statistical noise in the months ahead.

But there’s another – much larger – element at work in the oil market: geopolitics.

While the Qatar crisis has had little effect on prices, massive geopolitical problems could soon be on the way.

Uncertainty in Libya and Nigeria could quickly hit their production again. Heavy clashes occurred last week in Libya, reported Reuters, showing how the recent calm in that country could soon evaporate. Peace in the Niger Delta is also starting to look iffy. Former militants are unhappy with government promises, also according to Reuters, and have threatened a return to violence.

Yet Nigeria is aiming for August output of 2m b/d. That would be the highest level in a year and a half as well as being almost double last year’s low point, notes Nick Cunningham at Oilprice.com.

More aggressive Saudi foreign policy is another danger now that Prince Mohammed has taken over as Crown Prince, meaning that “the region could be subject to more volatility and heightened risk,” according to RBC last month.

But the real nasty could be Venezuela. Society there has almost broken down, says Neil Dwane of Allianz Global Investors, as street protests show no sign of slowing. The country’s refining industry is in chaos, forcing it to import fuel to avoid shortages. While Venezuela’s oil output is falling, it still produces around 2m b/d.

“Venezuela’s 2m barrels of oil a day could literally go any day. Mexico looks poor. Azerbaijan’s in trouble. China’s own production is collapsing rapidly,” Dwane told CNBC last week. “One only has to have one mistake and the only thing you’ll be talking about all morning is oil at $120.”

Brent crude is currently standing at around $47 per barrel. A more-than-doubling in the price would be great for oil producers. But it would be very bad news for almost everyone else. Keep watching those news headlines!

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