Syed Rashid Husain
BULLS and bears are fighting it out, battling for the control of the energy markets. Brent crude, the international oil benchmark, that almost doubled between January and June to reach $52 a barrel, has since been see-sawing in a narrow range, unable to break higher.
Now some are clamoring that $40 era may not have gone away for good. It could still stage a comeback. As markets are vying to strike a demand-supply balance somewhere, conflicting forces seem impacting, raising fears that the glut has not really diminished, but merely moved downstream. As the result, some now say, it could be a long, hard and volatile summer for oil markets.
The Paris-based IEA, the OECD energy watchdog, has just warned that crude stockpiles that kept rising over the last many months have pushed the floating storage to the highest level in seven years. “Stocks are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices,” the Paris-based group said in its latest report. And this is threatening the rebalancing process in the markets.
There are warning signs that global oil demand is ebbing while oil stocks remain at “elevated levels,” threatening a rebalancing act in oil markets, the International Energy Agency cautioned last Wednesday.
The IEA report said that while its data this month suggest that “little has changed with the market, showing an extraordinary transformation from a major surplus in the first quarter of 2016 to near-balance in the second quarter of 2016” there were signs of potential instability.
“In mid-summer 2016, although market balance is upon us, the existence of very high oil stocks is a threat to the recent stability of oil prices: in the first quarter of 2016 refinery runs growth (referring to the amount of oil a refinery can produce) was 60 percent higher than refined product demand growth,” it said.
With global refinery runs expected to fall by 800,000 barrels a day (bpd) in the second quarter of 2016 before surging by 2.4 mbpd in the third quarter, the IEA said that “we may well see crude oil stocks fall back but there is a risk that, unless demand turns out to be stronger than we currently anticipate, products stocks could rise still further and threaten the whole price structure.”
Neil Atkinson, head of the Oil Industry and Markets Division at the IEA, while summarizing the report told CNBC: “The main point of the report is that although the oil market is coming close to balance in the second half of 2016, it is doing so against a background of very, very high level of oil stocks which have been building up remorselessly over the last three years or so. These high stocks are a major dampener on oil prices, so I think we’re rather range-bound for the time being.”
Some are beginning to underline that the recovery in oil prices risks being derailed as the near two-year-old glut in crude is transformed into a huge surplus of gasoline and diesel that is swamping the market.
The situation is getting evident in the world’s largest market - the United States too. Last week crude inventories fell, less than analysts’ expectations. Analysts pointed fingers at the existing stocks for the development. Crude inventories fell 2.5 million barrels in the week to July 8, less than analysts’ expectations for a decrease of 3 million barrels, the US Department of Energy reported.
“A surprising build in gasoline in the peak of US driving season and a very large build in heating oil will set the tone for lower prices as we go forward,” Tariq Zahir, a trader in crude oil spreads at Tyche Capital Advisors in New York, was quoted as saying. “The products markets will continue to put weakness in the energy complex.”
Consequence was evident. Brent that had jumped 4.5 percent on Tuesday, staged a complete U-turn the next day after the US Energy Information Administration reported gasoline production outstripping demand by 500,000 barrels a day last week. Indeed gasoline prices were hit but it also weighed on US crude oil that was trading below $46 a barrel on Thursday.
Producers (mainly in the US and Canada) who shut down production as prices troughed into the 30s, are looking at the prices keenly. Already the rig numbers in the US are staging a recovery - slowly but surely. Many now feel that an uptick in oil prices could prompt a number of these producers to re-start production, upsetting the slow balancing of supply and demand.
The changing horizon on the global oil demand may also get into play, making the balancing process still slower .The IEA is now forecasting a “modest deceleration” in global oil demand growth that was foreseen for 2017, easing to 1.3 mbpd taking average deliveries up to 97.4 mbpd.
The IEA gave examples of where demand growth could be starting to ebb, with China and the US exemplifying the trend. “In China, data for May suggests that year-on-year demand growth was only 130,000 bpd, part of a recent trend of smaller increases. For the US, estimated gasoline deliveries in April were up just 75,000 bpd up on the year earlier and 410.000 bpd below our expectations.”
And although,” the saving grace for oil demand had been Europe where, in the second quarter of 2016 year-on-year growth reached a five-quarter high, “ yet, the IEA warned that “this was unlikely to last, with the ongoing precariousness of the European economies now dealing with added uncertainty following the result of the UK referendum on membership of the European Union.”
IEA’s Atkinson was quoted as saying that the vote had added “another layer of uncertainty” to underlying concerns over the health of the euro zone. “It’s more likely that the outcome of Brexit will be negative than positive for European oil demand but we’ll have to wait and see.”
Despite some recent strengthening, oil markets continue to tread a hazy route. Keeping aside the rattling because of the events in Istanbul, uncertainty continues to rule the energy markets.
