ShareKUWAIT: A threat of tightening oil supplies led by geopolitical issues in the Gulf pushed oil prices up this week after seeing consecutive declines over the past two weeks. In addition, the hunt for replacement crude by oil importers as a result of sanctions on Iran without waivers and on Venezuela also supported spot oil prices for some specific crude grades from producers in the Gulf and Africa. On the other hand, the trade war between the US and China was renewed after apparently failed talks between the two trading partners.
The US increased tariffs on $200 billion worth of Chinese imports from 10 percent to 25 percent and is said to be mulling tariffs on all imports from China. This was met by retaliatory tariffs from China on $60 billion worth of goods imported from the US starting June-19, although China has excluded crude imports from the US from the higher tariffs while increasing it on LNG imports.
Recent developments have affected both demand and supply side factors for the oil market. Demand side factors largely highlight the downside risks to oil prices in the near term. The renewed trade war has only spooked the market that has seen weakening economic indicators from key oil importers.
These include the consecutive decline in vehicle sales in China and India in addition to expectations that the US market has peaked and is expected to scale back its growth numbers in the near term. The EIA as well as the IEA, in their latest monthly oil reports, marginally lowered world oil demand growth expectations. The IEA expects 2019 oil demand to grow by 1.3 mb/d. Also, oil prices, which has recently traded above the $65/b mark, is said to have a negative impact on demand from Asian buyers.
On the supply side, the expected increase in oil supply from the US has already been factored in the prices. However, a number of other factors seems to have an offsetting impact on higher oil supplies from the US. These include, the imposition of sanctions on Iran and Venezuela, and the decline in oil supply from Russia to Europe due to an oil pipeline issue. Europe is also seeing some pockets with higher demand for physical crude due to higher refinery runs expected in the coming months coupled with lower supply from heavy oil exporters with the required crude grades. These include lower supplies from the North Sea due to production outage, along with Nigerian and Angolan crude grades.
In addition, production curbs from other OPEC+ members continues as a decision would be taken in June-19 on future production policy of the group. During May-19, OPEC oil production remained flat m-o-m at 30.3 mb/d, according to data from Bloomberg, as Saudi Arabia continued to produce at 4-year low levels.
On the other hand, production in Libya, although showing promising growth with new investments, remains fragile with a number of recent incidents that have affected oil facilities in the country. Russia's oil production is also said to be in compliance with the OPEC+ agreement that could also be as a result of the decline in supplies to Europe due to oil contamination.
Oil prices
Oil prices have trended downward over the last two weeks after reaching the highest level since November-18 touching $75/b during the last week of April-19. The decline was seen across commodity markets due to the US China trade dispute that failed to reach any resolution. The surge in prices during April-19, which saw prices going up 6.3 percent as compared to March-19, came after statements from OPEC indicated a disciplined approach to raising crude output against a shortfall created by sanctions on Iran and Venezuela. However, reports of higher output from the US and rising inventories quickly dampened the price rise pushing it down more than 4 percent in the next trading sessions.
The increasing pressure from the US on OPEC producers to raise output and lower oil prices also added to the decline in prices. Meanwhile, oil inventory in the US continued to rise unabated, especially during April-19, increasing by more than 27 million barrels in the last seven weeks until 3-May-19.
However, a surprise draw of 3.96 million barrels in its latest weekly report supported prices. The most recent rig count data from Baker Hughes reflected the marginal slowdown in US oil production. According to the latest weekly report, US oil rig count declined by 2 rigs to reach 805 active oil rigs offsetting an equivalent increase in the previous week. The monthly rig count data published by Baker Hughes showed average US rigs at 1,012 (including gas rigs), a decline of 11 rigs as compared to March-19. On the other hand, international rig count was up by 23 during April-19 to reach 1,062 with the Middle East region adding the most number of rigs during the month.
Average crude prices for almost all the key crude grades were positive in April-19 as compared to March-19. Average OPEC crude prices gained 6.6 percent m-o-m during April-19 to regain the $70/b mark for the first time in six months to average at $70.8/b. This was also the fourth consecutive month of gain for oil prices. Kuwait crude average price gains were also recorded at 6.6 percent and averaged at $71.2/b, while average Brent crude gained 7.7 percent to reach $71.2/b.
World oil demand
World oil demand estimates for 2018 remained unchanged in OPEC's latest monthly forecast and demand is estimated to have grown by 1.41 mb/d to reach 98.7 mb/d. Demand growth expectation for 2019 also remained unchanged at a growth of 1.21 mb/d resulting in a total demand of 99.94 mb/d. However, there were changes in the estimated production levels of individual countries. Demand from OECD countries were raised slightly by 0.1 mb/d primarily reflecting higher demand in the US that was partially offset by a marginal demand decline in Europe for the rest of the year.
The US continue to showcase strong demand trends as seen from monthly data until February-19 and preliminary data for March-19 and April-19. The main driver for higher demand was industrial and road transportation fuels, with higher usage of natural gas plant liquids, diesel fuel and gasoline. On the other hand, after recording strong demand in January-19, demand trends in OECD Europe was sluggish during February-19 and March-19 primarily due to lower usage of diesel and gasoline in the road transportation sector while jet kerosene continues to remain strong led by economic growth and consumption by airlines.
The region recorded a decline in vehicle sales during Q1-19 and has seen a shift from diesel to gasoline usage for cars. For the non-OECD group, demand growth in 2019 is expected to be slightly lower as compared to last months' estimates due to a downward revision in demand figures for Latin America and the Middle East led by weak Q1-19 demand data in addition to lowered economic growth expectations.
Nevertheless, demand for China was revised slightly upwards highlighting better economic outlook. The country recorded higher demand during Mach-19 led by aviation driven growth in the transportation sector and positive development in the petrochemical sector. Demand for gasoline increased by 3 percent y-o-y during March-19 despite recording a decline in passenger car sales for the ninth consecutive month that reached around 2 million units, a drop of 7 percent y-o-y. Oil demand in India also grew during March-19 with consumption increasing by 1 percent y-o-y led primarily by higher demand for gasoline and LPG. The country reported a drop in passenger car sales but commercial vehicle sales were marginally higher. In the Middle East region, Saudi Arabia recorded a drop in oil usage in March-19 but Iraq recorded positive trend.
World oil supply
According to preliminary data, global oil supply declined for the fifth consecutive month during April-19. Supply went further below the 100 mb/d mark and was estimated at 98.82 mb/d in April-19, a m-o-m decline of 0.07 mb/d. During the month, non-OPEC supply dropped by 0.07 mb/d led by a decline in production from Kazakhstan, Canada, China and Russia. For the full year 2018, non-OPEC supply growth estimates for 2018 was revised up marginally by 8tb/d and is now expected to have grown by 2.91 mb/d during the year to average at 62.37 mb/d.
The revision mainly reflected higher output from Canada in Q4-18. Non-OPEC supply growth forecasts for 2019 was revised marginally downwards by 33 tb/d to 2.14 mb/d and supply is now expected to average at 64.52 mb/d. The revision primarily reflected lower-than-expected Q1-19 production in the US, Brazil and the UK with a downward revision totaling 180 tb/d that was partially offset by an upward revision of 55 tb/d for Q1-19 output from China. Supply from OECD countries was revised downward by 44 tb/d. The latest EIA report for week ending 3-May-19 showed a slight drop in US oil production.
That said, the EIA expects US shale oil production to increase by almost 83 tb/d in June-19 to 8.46 mb/d with output from the Permian Basin expected to grow by 56 tb/d to reach 4.17 mb/d. The overall liquids supply for 2019 from the US was revised down by 0.02 mb/d due to revision to numbers for the first two months of this year. Supply from the OECD Europe region declined by 0.07 mb/d m-o-m during March-19 led by downward revision to supply figures from the UK.
KAMCO Oil Market Monthly Report
