Oil demand concerns set to take over; rally in prices likely to halt soon
Oil market's fundamentals remain negative on account on reduction in geopolitical risks.
Commodity Summary MCX
Market concerns heighted and remained escalated over geopolitical risks after Iran crossed the 3.67 per cent limit of uranium enrichment purity. Although the world’s two largest economies have called a trade war truce and resumed talks, President Donald Trump complained China hasn’t met a pledge to buy more American farm goods.
Tropical Storm Barry boosted crude futures as oil companies in the Gulf of Mexico sliced production. Companies cut more than 1 Mbpd of output, or 53 per cent of the region’s production. Barry’s impact on oil production will depend on how long the lingers and how much damage it causes to the region’s energy infrastructure. It has the potential to cut Gulf of Mexico crude production by 140,000 to 230,000 Bpd in July.
Data from EIA showed that the US crude oil stockpiles fell by nearly 10 Mbpd, far more than expected, as refineries processed the most crude oil since January. Refinery crude runs rose by 148,000 barrels per day to hit 17.4 million bpd, the most since early January, responding to higher summer demand. Refinery utilisation rates rose by 0.5 percentage points to 94.7 per cent of overall capacity, also their highest since January. That is even though refinery operations fell to 69.5 per cent of capacity on the East Coast in the wake of the shutdown of the Philadelphia Energy Solutions complex, the largest in the region.
Gasoline stocks fell by 1.5 million barrels, near expectations for a 1.3 million-barrel drop. Distillate stockpiles rose by 3.7 million barrels, versus expectations for a 739,000-barrel increase. Net US crude imports fell last week by 341,000 bpd, while crude production edged up 100,000 bpd to 12.3 million bpd. Crude stocks at the Cushing, Oklahoma, delivery hub for crude futures fell by 310,000 barrels. The weekly US oil rig count fell for the second straight week, as drillers cut four oil rigs in the week to July 12, reducing the total to 784, the lowest since February 2018.
For China, small-scale refiners known as teapots are coming under the most pressure to make fresh output cuts extending curbs many of them made in May and June as China’s fuel producers are making extended curbs to their output in the third quarter after supply from mammoth new refineries stoked an already-sizeable glut, potentially dragging on crude oil demand from the world’s biggest importer of the commodity.
IEA stated that oil market showed a global surplus of 0.5 Mb/d in the second quarter this year versus previous expectations of a 0.5 million b/d deficit. IEA monthly report stated that oil market saw a rather significant surplus in the first half of 2019, much larger than previously expected. Looking forward, supplies are set to tighten in the second half of the year, but that may only be a lull before the glut returns.
Global oil supply exceeded demand by about 0.9 mb/d in the first six months of this year. The extension of the Opec+ cuts through the first quarter of 2020 removes a major uncertainty, but the IEA said it does not change the fundamental outlook of an oversupplied market. Global demand for Opec oil looks likely to fall to its lowest in over 16 years as the US’s production share rises.
The IEA said demand from the Opec in first quarter of 2020 will fall to 28 Mbpd. Overall, all three of the major forecasters – Opec, IEA and EIA see robust supply growth from US shale. Excluding Venezuela and Iran, Opec's market share has fallen from a recent peak of 36.7 per cent in September 2016 to 34.5 per cent currently.
Opec and Middle East tensions
On geopolitical tensions, the markets remained on the edge as tensions intensified between Iran and the West. Tehran said that Britain was playing a dangerous game after seizure of an Iranian tanker on suspicion it was breaking European sanctions by taking oil to Syria. Meanwhile, Iran is ready to hold talks with the US if Washington lifts sanctions and returns to the 2015 nuclear deal it quit last year as reported by Iranian President.
Venezuela’s refining complex CRP has been shut down after a blackout, Argus Media reports, citing union officials from the complex as saying the blackout was caused by a catastrophic failure in a turbine at the power plant that supplies electricity to CRP. The complex has processing capacity of 955,000 bpd.
However, despite the persistent operational problems and the decline in production, Venezuelan oil exports have been on the rise as Venezuela struggles to keep its bargain with China. Last month, daily exports rebounded to 1.1 million bpd because of this deal, with the amount going to China at 656,000 bpd.
Despite an economic and political crisis and crippling sanctions, Chevron has not pulled out from Venezuela, even as most other international companies have already done so. However, the company’s waiver from the US government expires at the end of this month and its operations would be wrecked if the waiver is not extended.
Right now, all factors point for a temporary rally, but overall fundamentals remain negative on account on reduction in geopolitical risks and the negative reports from the agencies. Bullish traders seemed a little nervous because of uncertainty over flood damage from Hurricane Barry. If the flooding caused little or no damage, which would delay production, then prices could retreat. Additionally, although tensions are high in the Middle East, we’re not likely to see any prolonged rally unless there is an actual loss of crude oil.
Due to the shutdown of rigs in the Gulf of Mexico ahead of hurricane, there is likely to be less certainty over the numbers. For this week, we expect WTI prices to trade in a range of $58-59 levels.
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