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CRUDE IN SIGHT

Brent bounces up early Tue amid bargain-hunting after another rout - 17 July 2018

  • ICE Brent futures were climbing briskly early Tuesday in Asia, as a second big price slump in as many weeks provided a buying opportunity for bargain-hunters. The recovery, though, was mild in comparison with Monday’s drop. NYMEX WTI, which did not fall as hard as Brent in Monday’s session, was trading flat to a few cents higher.
  • Tuesday’s slide, combined with a bigger one on July 11, cumulatively stripped nearly $8/barrel or 10% off Brent’s value. A combination of coincidentally synchronous rise in crude supply from a few OPEC countries and the US doing its best to jawbone the market down worked to scare the bulls away in an increasingly nervous market.
  • Three major developments have quickly eased market concerns on the supply front: Saudi Arabia, OPEC’s largest producer and the one holding the most spare capacity in the world, began offering its Asian customers more crude cargoes. Libya swung from pumping at half its capacity of around 1 million b/d following militant attacks on its eastern ports in mid-June to ramping up to its full potential starting last week. In Nigeria, Shell lifted a nearly two-month-old force majeure on Bonny Light crude exports at the end of last week. Bonny Light is one of Nigeria’s major grades, with an average output of 200-250,000 b/d.

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ARCHIVES

Oil Viewsletter

Oil tumbles on demand fears but supply woes will lend support - 13 Jul 2018

  • Brent’s spectacular dive on July 11 wiped $5.46 off the price of the front-month ICE futures contract — the biggest single-day loss in seven years — and led some to ask if it was the start of an oil price “correction.” We don’t think it was.
  • While crude was justifiably spooked by the prospect of the US-China trade war spiralling out of control with a new threat from Washington the previous day to levy a 10% tariff on $200 billion worth of annual imports from the Asian giant, it is not enough to upturn the oil market’s tightening supply fundamentals.
  • The limited spare capacity available with Saudi Arabia, its Gulf OPEC neighbours and Russia looks likely to be stretched thin compensating for the continuing sharp declines in Venezuela, Angola and Mexico in the coming months.
  • More importantly, that small spare capacity leaves the market fully exposed to a supply shock on account of Iran if the US adopts a scorched-earth policy of trying to squash the Islamic Republic’s oil revenues to zero.
  • PLUS:  Keep this Iran wildcard in view; Oil demand in the tariffs crossfire; OPEC learns to walk the tightrope

BULLS & BEARS

Overall outlook rangebound, consolidation mode - week of 28 May-1 Jun 2018

  • ICE Brent and NYMEX WTI crude futures have shed more than 5% since the Saudi and Russian energy ministers meeting in St. Petersburg May 25 agreed it was time to raise supply by about 1 million b/d.
  • Though the decision is expected to sail through at the OPEC/non-OPEC ministerial meeting in Vienna on June 22, there is a chance that the agreed increase will be smaller, erring on the side of caution. The additional barrels have yet to hit the market and the market may finally pause on the furious sell-off.

ENERGY RADAR

Price rally is sticking but hinges on OPEC/non-OPEC discipline - January 2017

  • With global oil demand growth likely to be tepid again in 2017, the much-awaited market rebalancing hinges on suppliers honouring their commitment to cut.
  • OPEC is not only seeking resurrection, but will be making history if it manages to actually balance crude in the target $50-60/barrel range.
  • US shale patch activity and rig counts picked up through the second half of 2016, but does this mean tight oil production is poised for a rebound?
  • Downside risk to demand growth: Consensus estimates for a 1.35 million b/d rise in global oil consumption this year might be overshooting.
  • A double whammy from rising crude prices and a stronger US dollar to emerging economies could dent demand growth in major consumers such as China, India.