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Oil Market Report - May 2018

EXECUTIVE SUMMARY

In May Brent oil price finally got to $80 per barrel. Almost all the gain was made on Trump’s decision to cut off from the deal with Iran and to return oil sanctions. Geopolitical nature of the rally made it quite unstable, but significant correction began only after both Saudi and Russia had promised some production growth (up to +1 mln bbl / d)  in 3rd quarter to ease the risks.

Europe turned against US wave of aggression on Iran. US sanctions are very hard to avoid, but EU officially pronounced its intentions and means by which it will try to save the nuclear deal. Discussions between the USA and EU on the matter are expected in early June.

India announced that it will comply to oil embargo only in case of overall UN decision, not US lifting sanctions alone.  It is similar to their prior statement that with EU support India will continue to export Iranian oil.

South Korea stands apart as the only key risk of immediate effect on supply (about 250 thsd bbl /d of Iranian oil bought in 2017). According to Bloomberg, Saudi Arabia would like adding production by OPEC+ group by the same amount (300 thsd bbl /d). Russia on the other hand is more inclined to +800 thsd bbl / d. Apparently Saudi Arabia is eager to avoid another crude oil price crash. However given Venezuela oil production struggles, the organization could add up to 1 mln bbl / d without visible consequences for deal’s compliance level (about 150% over compliance in April).

Fundamental situation in the market is still the matter of concerns in spite of rebalancing crude oil storage levels in OECD region to 5-year average. Growth in world oil demand may be highly sensitive to the $70+ per barrel prices.  It is likely the reason U.S. president Trump confirmed in a tweet his frustration of OPEC+ deal supporting oil price rally.

U.S. average gasoline prices rose above $3 per gallon on Monday (Memorial Day) for the first since Nov 2014. Diesel price, which feels more tightness in the market due to cold winter, had already been above $3 per gallon level for some time.

U.S. oil exports on one week in May surpassed 2.5 mln bbl / d level. Net imports of crude oil, gasoline and distillates were below 4 mln bbl / d mark this week. Because of low net import stocks of oil and oil products in the USA look at very comfortable level despite substantial draw downs.

WTI benchmark discount to Brent widened to above $10 per barrel. It will further stimulate U.S. oil exports to the limit of logistic constrains.

Saudi Arabia raised crude oil output to 7-month high, nearing 10.1 mln bbl / d in May, according to data from tanker tracker Petro-Logistics.

However, OPEC oil output declined by 70 thsd bbl / d to 32 mln bbl / d in May, the lowest production since April 2017. Nigeria and Venezuela were countries where production decreased the most, according to Reuters’ survey. The level of compliance was at 163%.

Some OPEC members stand against higher production quotes because it seems as Saudi Arabia suddenly changed its strategy after a call from the USA to ease geopolitical risks in the crude oil market. Increasing production, Saudi Arabia is believed to help the USA to sanction Iran and Venezuela oil exports without high risks of crude oil price spikes.

However, the price is already at the very high level. Hence Saudi’s intentions can be explained not only by U.S. pressure but attempt to avoid demand destruction. There are signs that high prices are hurting demand.

According to last EIA petroleum weekly data, U.S. consumers bought 376.99 mln gallons of gasoline per day last week. That is 14.32 mln less per day comparing to the numbers a year ago. It cost them $1,184 bn per day, $163.8 mln more dollars per day than same week last year.

OPEC meeting is scheduled on June 22. Meeting with non-OPEC countries will take place the next day June 23.

Also prior to the meeting some discussions among export countries are certainly will be arranged. For an instance, Saudi and Russian Energy Ministers are eager to discuss the matter one more time during open game of Football World Cup in Moscow on June 14 between Russia and Saudi Arabia teams.

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