By Arab News
By Faisal Mrza*
Oil markets were disappointing last week, as reports of stocks oversupply and poor economic numbers sent prices tumbling.
The International Energy Agency (IEA) has succeeded in paving the way for a low oil price environment by promoting poor oil demand growth globally with unjustified pessimism and weak arguments. The IEA’s gloomy outlook managed to set the stage for Brent to hover near $70 per barrel and WTI to flirt with $60 per barrel (the lowest levels since April 2018).
By the weekend, prices fell about 20 percent from their October highs, with Brent at $70.18 per barrel and WTI down to $60.19 per barrel. The drop in WTI prices for a tenth day is the longest losing streak in at least three decades. It is the fifth straight week of losses for crude futures.
Crude prices took a nosedive as waivers on Iranian sanctions and rising supplies offset export- cut concerns. The oil market is delinking somewhat from equities, which have largely been rebounding since early November. The surge in supplies has helped to drive bullish speculators out of the paper market. This in turn has weakened the underlying structure of oil futures, creating a discount for near-term contracts compared to longer-dated ones. Consequently, the bulls are challenged to prove themselves correct in such unpredictable times.
US crude stocks increased for the seventh consecutive week. This left domestic crude stocks nearly 37 million barrels higher than they were in mid-September as a result of US weekly crude oil production that jumped to the highest on record. Also, the global supply outlook has improved with the restart of Libya’s oil production to 1.25 million barrels per day. All Libya’s oil fields and ports are operating, although protesters are once again threatening a shutdown of El Sharara, the largest producing field. All these bearish developments have put massive downward pressure on oil prices.
Other developments in the physical market that sent the oil-market bears into a frenzy are soaring freight rates, amid rising shipments from the Arabian Gulf to China. Refining margins also slumped further across all regions in October. Light products contributed to the weak margin, as Naphtha and LPG crack spreads fell throughout the month and undermined rises in middle distillate and fuel oil crack spreads.
Gasoline was predominantly responsible for much of this weakness. Gasoline crack spreads in the US Gulf coast, Northwest Europe and the Mediterranean have fallen steadily since August and by the end of October hit their lowest level since mid-2014. Gasoline margins turned negative in China, but diesel demand remains robust and expectations are for exports of both products to increase, which could weigh on Singapore prices.
US gasoline prices have come under pressure from rising stocks, slow demand and a looming switch to winter-grade products. Weak gasoline margins kept Naphtha prices soft amid slackening demand, while high freight rates pressured export interest.
It appears that the weakness in gasoline markets may partly be a result of US President Donald Trump’s intention to allow a higher ethanol blend in the national specification for summer gasoline.
The key motive for allowing an E15 ethanol blend in the summer appears to be to try to push down the price of gasoline at the pump by adding about 400,000 to 500,000 barrels per day of a cheaper product to the US gasoline pool. This change would have been ineffective after the summer high gasoline demand season and will leave some additional unwanted volumes of gasoline in the US upon the upcoming winter season and the low demand for gasoline.
With the start of the Iranian sanctions, and a month prior to the critical 175th meeting of the OPEC Conference, due to be held on Dec. 6, there will be many considerations for the new oil output strategy in order not to flood the market while keeping it well balanced. This comes at a time when Goldman Sachs emphasized that there will be an oil shortage in 2020 as a result of a lack of upstream investment.
The OPEC/non-OPEC Joint Ministerial Monitoring Committee (JMMC), chaired by Saudi Arabia, will meet today in Abu Dhabi to assess market conditions and discuss next steps. In its October meeting, the JMMC has already directed its Joint Technical Committee (JTC) to continue to study the 2019 outlook and present options on 2019 production levels to prevent the reemergence of a market imbalance.
* Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza