- Brent crude posts sharp post-Doha recovery
- Global demand on the rise, supporting prices
- Collapsing Brent contango could see supplies rise
The Kuwait strike has ended, adding 1 million barrels/day to the world's oil supply. Photo: iStock
By Ole Hansen
After touching $40/barrel in the aftermath of the failed Doha meeting, Brent crude has since recovered and almost made it back up to $45/b yesterday. The oil strike in Kuwait which was called off yesterday saved the day for the embarrassed group of oil ministers leaving Doha last Sunday.
The focus on Monday morning quickly turned from price war and overproduction to another involuntary supply disruption. This latest disruption was one of several over the past couple of months which, together with the slowing US production, has supported the strong recovery and attracted investors.
With Kuwaiti production moving towards pre-strike levels the focus can return to the other drivers, of which there are currently numerous ones pulling the price in both directions. Before we highlight some of these, the short-term focus has returned to North America where the US Energy Information Administration will release its weekly inventory report later today at 4:30 CET.
The American Petroleum Institute released its estimate late yesterday and the rise of 3.1 million barrels was close to double of what was expected. A Bloomberg survey covering today's report has put the last inventory rise at 2.3 million barrels with the other expectations seen below:
Let me try to highlight some of the current drivers which hopefully help to explain some of the continued volatility in the market.
Supporting higher prices
- The rebalancing process is well underway, especially in North America where US and Canadian high-cost producers are forced to cut production.
- Global demand continues to rise and together with the slowdown in non-Opec production this well help support the price over the coming months.
- Capex cuts worth billions of dollar has created a situation where the market focus eventually will shift from oversupply to lack of supply.
- In the very short term the oil worker strike in Kuwait, now over, has been a major supporting factor as it removed more than 1.5m barrels of daily production
Supporting the call for lower prices
- A faster-than-expected increase in production from Iran and a stabilising Libya which raises the prospects of barrels returning from a country which used to produce 1.6M b/d and now only around 300,000 b/d.
- Following the failed Doha meeting, there is a risk that the power structure in Saudi Arabia has changed thereby increasing the political impact on oil prices. If Saudi Arabia turns its oil weapon on Iran and begin increase production, as threatened, a revisit to the low $30s cannot be ruled out.
- In the very short term, a record long speculative position in Brent crude could have a significant negative impact on the price if events trigger a need to reduce exposure.
- The collapsing contango in Brent crude which on one hand has cheered investors as it reduces the pain of holding a long position could in near term lead to rising supply as storage plays are being abandoned. The six-month contango – i.e. the discount between the sixth and first month – hit $4.5 back in January and since then it has collapsed to just $1.5 currently. At current levels, storage plays from both on- and offshore "cash and carry" trades will increasingly be abandoned, thereby reducing supply into an already oversupplied market.
We still see Brent crude oil to be rangebound between $35/b and $45/b this current quarter before moving higher in the second half towards $50/b by year-end. We also have to respect the continued demand for oil from investors and unless they are being challenged by changes to the short term outlook, these trades will be maintained.
This will leave the risk skewed to the upside which in turn may end up being self defeating due to improved economics in North America which could help stabilise (falling) production while also increasing supply from abandoned carry trades.
But for now we should focus on today's inventory report which during the past four weeks has generated major market moves.
With Doha behind us, the oil market's focus now returns to supply and demand. Photo: iStock
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank