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Oil Market Report - September 2018


In September crude oil market was all about looming Iran sanctions and real numbers for Saudi Arabia’s spare capacities. At the meeting of OPEC’s monitoring committee on September 23 nothing was mentioned regarding preventive measures to make sure that the market will not notice if Iran’s oil export volumes are suddenly lowered by U.S. sanctions to zero indeed. Brent crude oil price went above $80 per barrel after the meeting.

Base-case scenario after sanctions return that Iran’s oil exports are likely not going below 1 mln bbl / d level due to key buyers like China, India and Turkey are seemingly willing to find ways for avoiding U.S. pressure.

The market apparently is pricing in bear-case scenario with all of the export volumes from Iran gone instantly and Saudi Arabia not able to compensate these supplies in the same moment with its spare capacities. In case of zero Iran’s export the situation could be very tight indeed and 1.5 mln b / d of Saudi spare capacities are under question.

In its monthly oil outlook OPEC cut the estimate for global demand for its crude next year due to weakening economic growth and higher output from rivals, notably U.S. shale drillers.

According to Bloomberg, the weaker outlook comes as pressure is increasing on the Organization of Petroleum Exporting Countries and its allies to pump more to offset the impact of looming U.S. sanctions on Iran and Venezuela’s collapsing oil industry. In addition to tweets from President Donald Trump demanding action, OPEC Secretary-General Mohammad Barkindo said that India has written to the group expressing its discomfort with the current market.

The group’s daily production rose by 132 thsd bbl / d in September to 32.76 mln bbl / d. While Iran’s output fell by 150 thsd bbl / d and Venezuela lost 42 thsd bbl / d, Saudi Arabia and Libya more than offset the decline.

The group reduced its estimates for the expansion in global consumption in 2018 and 2019, citing slowing economic activity in emerging markets. Demand growth of 1.54 mln bbl / d this year will slow to 1.36 mln bbl / d next year. At the same time, it added 200 thsd bbl / d to its estimate for non-OPEC supply this year as the U.S., Canada, Kazakhstan and Brazil grow faster than expected.

Stockpiles of crude and refined products in industrialized countries rose by 14.2 mln bbls in August, a second consecutive monthly increase. The outlook for supply and demand in 2019 indicates that inventories could continue to rise, Barkindo said.

Oil prices could fall next year as the “fear factor” that’s currently gripping the market subsides, Ian Taylor, chairman of the world’s largest independent oil trader Vitol Group, said in an interview with Bloomberg television. Crude could be $5 to $10 lower by January, he said.

The International Energy Agency (IEA) said in its monthly report that the world’s spare oil production capacity was down to 2 percent of global demand, with further falls likely.

“This strain could be with us for some time and it will likely be accompanied by higher prices, however much we regret them and their potential negative impact on the global economy,” the Paris-based organization said.

Supply from Iran during September dropped to a two-and-a-half year low, the IEA said, as customers continued to cut back in the run-up to new sanctions, which start on Nov. 4.

Iranian output fell to 3.45 mln bbl / d, it said, down 180 thsd bbl / d month-on-month. Iranian oil exports in September fell to 1.63 mln bbl / d, down 800 thsd bbl / d from recent 2Q18 peaks, the agency estimated.

“The decline may deepen significantly ahead of U.S. sanctions - and subsequently as final cargoes are delivered,” said the IEA, which advises major oil consumers on energy policy.

The outlook for world oil consumption is faltering, the IEA said as it cut its forecast of global oil demand growth by 0.11 mln bbl / d for both this year and next to 1.28 mln bbl / d and 1.36 mln bbl / d respectively.

“This is due to a weaker economic outlook, trade concerns, higher oil prices,” it said.

OECD commercial stocks rose by 15.7 mln barrels in August to 2.854 bn barrels, their highest level since February, on strong refinery output and liquefied petroleum gas restocking, the IEA said.

OECD inventories were likely to have risen by 43 mln barrels in the third quarter, the largest quarterly increase in stocks since the first quarter of 2016.

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