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Oil Market Report - October 2018

EXECUTIVE SUMMARY

In October crude oil market caught a “bear flu” after almost gripping the $90 per barrel price level (Brent).  In the beginning of October the market apparently priced in quite a lot of risks regarding U.S. threats to zero Iran’s oil exports. On the second week of the month these risks suddenly started easing. It seems all the September’s rally was highly speculative in nature indeed. 

U.S. granted 8 countries 6-months waivers on November 2, including India, South Korea, Japan and China. It was surprising for the market given several months of very aggressive rhetoric. It was believed to be a political move, to put downward pressure on oil prices, taken just days before Americans headed to the polls in mid-tern elections on the 6th of November.

Interestingly the European Union, which recently announced the creation of an economic channel to continue financial dealings with Iran, was not among those receiving waivers. However, oil exports from Iran to EU had been lowered below 100 thsd bbl / d already. China and India are much more important in this matter.

OPEC signaled it could cut output in 2019 due to concerns about rising oil inventories and economic uncertainty, lurching away from a pledge made just days ago to pump flat out. A committee of producers including Russia and Saudi Arabia highlighted the next day after mid-term elections the need to prepare “options” for how much oil they should pump next year to prevent the market slipping back into imbalance. The group, which since May has been boosting production, said the rise in oil inventories in recent weeks coupled with fears about an economic slowdown “may require changing course.”

Global oil markets are going through a very sensitive period - global economic growth as well,” IEA Executive Director Fatih Birol said in an interview in London on the day of OPEC changing its rhetoric. “If the oil producers care about the health of the growth of the global economy, which I believe they do, they should take the steps to further comfort the market.”

The outlook for next year is very unpredictable, according to Saudi Energy Minister Al-Falih. “If the supply is too long, we should be able to cut,” he said in an interview with Russia’s TASS news agency. “If supply is short, we have to be able to respond.”

The U.S. Energy Information Administration (EIA) projected that U.S. crude production will average 12.06 mln bbl / d in 2019, passing the 12 mln bbl / d milestone much sooner than expected, largely on the back of increased shale oil production from the Permian basin. In 2019, the EIA said it expected production to increase 1.16 mln bbl / d from the prior year, up from the previous 1.02 mln bbl / d earlier forecast.

Growing U.S. oil production and eased geopolitical risks are the main drivers of oil price unstoppable falling from maximum levels. If numbers at the end of November show stable Iran’s exports in spite of U.S. sanctions then the price will likely return to $60-70 per barrel trade range.


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