Oil Market: Bloomberg's Take - July 19
Posted: Mon Jul 19, 2021 12:08 pm
By Grant Smith
(Bloomberg) -- The deal to boost production struck by OPEC+
after two weeks of haggling helped send oil prices tumbling. But
the slump may not last long.
While the cartel will keep gradually reviving production
shuttered during the pandemic, market watchers warn the
increases aren’t enough to fill the looming supply shortfall.
With demand roaring back in the U.S. and China, the group’s
cautious pace could trigger another price rally that feeds into
global inflation.
“The 400,000 barrels a day being put into the market will
turn out to be a pittance,” Ed Morse, head of commodities
research at Citigroup Inc. said in a Bloomberg Television
interview. “On the whole, this is a very tight market.”
Oil refiners are feeling emboldened as the Organization of
Petroleum Exporting Countries ends its internal dispute --
centered around a clash over output quotas between Saudi Arabia
and the United Arab Emirates -- and heeds calls to open the
taps. With more barrels about to hit the market, buyers in Asia
are holding out for bargains.
The International Energy Agency -- which advises many major
consumers and had urged OPEC+ to boost output -- said the
agreement “may go a long way toward filling the substantial
supply gap we had expected during the second half of this year.”
International oil prices tumbled as much as 5.8% on Monday
to a seven-week low below $70 a barrel as the OPEC+ announcement
coincided with a broader market rout amid renewed fears over the
coronavirus.
Expected Tightness
Nonetheless, any sense of relief among consumers could
prove fragile. With the scope of the OPEC+ supply increases
limited by Riyadh’s profound sense of caution, forecasters such
as Goldman Sachs Group Inc., UBS Group AG and Julius Baer Group
Ltd. expect the oil market to tighten.
That could send prices back to the two-year high above $77
a barrel seen last week, or even higher.
OPEC+ said its production increases will start next month,
but several of the alliance’s key members have already locked in
sales volumes for August. Extra barrels are unlikely to arrive
in time for the final weeks of the peak holiday driving season
in the U.S., where fuel consumption has hit a record.
Even if the group manages to make the full output hike in
August, the planned 400,000 barrel-a-day boost will barely cover
a quarter of the shortfall it projected for the month. An
average supply deficit of about 1 million barrels a day will
still persist for the rest of the year, data from the OPEC+
Joint Technical Committee indicate.
“With oil demand growth outpacing supply growth in the near
term, we still expect a tight summer, which should boost oil
prices,” said Giovanni Staunovo, an analyst at UBS in Zurich.
Delta Variant
Of course, demand forecasts could be wrong, and the fast-
spreading delta variant of the coronavirus is threatening to
throw some countries’ economic revival into reverse. But if
current trends continue, a market that has already been
tightening fast could remain under acute strain.
The massive glut that piled up during the pandemic has
already cleared, according to the Paris-based IEA. Inventories
in the U.S. have been falling at the fastest rate on record,
depleting sharply at the nation’s storage hub in Cushing,
Oklahoma. Across developed nations, stockpiles are below the
2015 to 2019 average that OPEC+ uses as a gauge of market
stability.
“By anyone’s standard, this implies a very tight market,”
said Tamas Varga, an analyst at brokers PVM Oil Associates Ltd.
in London.
Paper Cuts
On paper, the OPEC+ accord appears to substantially
increase the volume of crude the 23-nation alliance will return
to the market in 2022, revising its off-line capacity up by
about 1.6 million barrels a day.
Yet these changes -- which include a highly theoretical
baseline for Russia -- are seen by analysts as a diplomatic
contrivance to help resolve the group’s impasse.
Saudi Energy Minister Prince Abdulaziz bin Salman told
reporters on Sunday that, regardless of the new numbers, monthly
production increases by OPEC+ next year will remain capped at
400,000 barrels a day. The practical impact of the new quotas
may lie in how next year’s supply increases are parceled out
between members.
Iran Deal
Hopes that Iran could provide consumers with a late-
summer supply boost are also dwindling.
Tehran has been engaged in negotiations to revive a nuclear
accord with the U.S. that would remove American sanctions on its
petroleum exports. With a deal, the IEA estimates Iran could add
about 1.4 million barrels a day -- enough to plug much of the
shortage anticipated this year.
But negotiations appear to have stalled, and diplomats say
they’re unlikely to resume until the Islamic Republic has a new
president next month. That could defer any extra supplies the
country into the fourth quarter.
In the meantime, consumers may need to brace for a
difficult few months.
“Short term, these additional barrels will not be enough to
bring the oil market back into balance,” said Carsten Menke, an
analyst at Julius Baer in Zurich.
(Bloomberg) -- The deal to boost production struck by OPEC+
after two weeks of haggling helped send oil prices tumbling. But
the slump may not last long.
While the cartel will keep gradually reviving production
shuttered during the pandemic, market watchers warn the
increases aren’t enough to fill the looming supply shortfall.
With demand roaring back in the U.S. and China, the group’s
cautious pace could trigger another price rally that feeds into
global inflation.
“The 400,000 barrels a day being put into the market will
turn out to be a pittance,” Ed Morse, head of commodities
research at Citigroup Inc. said in a Bloomberg Television
interview. “On the whole, this is a very tight market.”
Oil refiners are feeling emboldened as the Organization of
Petroleum Exporting Countries ends its internal dispute --
centered around a clash over output quotas between Saudi Arabia
and the United Arab Emirates -- and heeds calls to open the
taps. With more barrels about to hit the market, buyers in Asia
are holding out for bargains.
The International Energy Agency -- which advises many major
consumers and had urged OPEC+ to boost output -- said the
agreement “may go a long way toward filling the substantial
supply gap we had expected during the second half of this year.”
International oil prices tumbled as much as 5.8% on Monday
to a seven-week low below $70 a barrel as the OPEC+ announcement
coincided with a broader market rout amid renewed fears over the
coronavirus.
Expected Tightness
Nonetheless, any sense of relief among consumers could
prove fragile. With the scope of the OPEC+ supply increases
limited by Riyadh’s profound sense of caution, forecasters such
as Goldman Sachs Group Inc., UBS Group AG and Julius Baer Group
Ltd. expect the oil market to tighten.
That could send prices back to the two-year high above $77
a barrel seen last week, or even higher.
OPEC+ said its production increases will start next month,
but several of the alliance’s key members have already locked in
sales volumes for August. Extra barrels are unlikely to arrive
in time for the final weeks of the peak holiday driving season
in the U.S., where fuel consumption has hit a record.
Even if the group manages to make the full output hike in
August, the planned 400,000 barrel-a-day boost will barely cover
a quarter of the shortfall it projected for the month. An
average supply deficit of about 1 million barrels a day will
still persist for the rest of the year, data from the OPEC+
Joint Technical Committee indicate.
“With oil demand growth outpacing supply growth in the near
term, we still expect a tight summer, which should boost oil
prices,” said Giovanni Staunovo, an analyst at UBS in Zurich.
Delta Variant
Of course, demand forecasts could be wrong, and the fast-
spreading delta variant of the coronavirus is threatening to
throw some countries’ economic revival into reverse. But if
current trends continue, a market that has already been
tightening fast could remain under acute strain.
The massive glut that piled up during the pandemic has
already cleared, according to the Paris-based IEA. Inventories
in the U.S. have been falling at the fastest rate on record,
depleting sharply at the nation’s storage hub in Cushing,
Oklahoma. Across developed nations, stockpiles are below the
2015 to 2019 average that OPEC+ uses as a gauge of market
stability.
“By anyone’s standard, this implies a very tight market,”
said Tamas Varga, an analyst at brokers PVM Oil Associates Ltd.
in London.
Paper Cuts
On paper, the OPEC+ accord appears to substantially
increase the volume of crude the 23-nation alliance will return
to the market in 2022, revising its off-line capacity up by
about 1.6 million barrels a day.
Yet these changes -- which include a highly theoretical
baseline for Russia -- are seen by analysts as a diplomatic
contrivance to help resolve the group’s impasse.
Saudi Energy Minister Prince Abdulaziz bin Salman told
reporters on Sunday that, regardless of the new numbers, monthly
production increases by OPEC+ next year will remain capped at
400,000 barrels a day. The practical impact of the new quotas
may lie in how next year’s supply increases are parceled out
between members.
Iran Deal
Hopes that Iran could provide consumers with a late-
summer supply boost are also dwindling.
Tehran has been engaged in negotiations to revive a nuclear
accord with the U.S. that would remove American sanctions on its
petroleum exports. With a deal, the IEA estimates Iran could add
about 1.4 million barrels a day -- enough to plug much of the
shortage anticipated this year.
But negotiations appear to have stalled, and diplomats say
they’re unlikely to resume until the Islamic Republic has a new
president next month. That could defer any extra supplies the
country into the fourth quarter.
In the meantime, consumers may need to brace for a
difficult few months.
“Short term, these additional barrels will not be enough to
bring the oil market back into balance,” said Carsten Menke, an
analyst at Julius Baer in Zurich.