Analysts’ warnings of excess oil sloshing around the world are being quickly replaced with fears of impending capacity constraints
Analysts’ warnings of excess oil sloshing around the world are being quickly replaced with fears of impending capacity constraints.
On Tuesday, Morgan Stanley raised its Brent forecast to US$85 per barrel, from US$77.5, citing concerns that the United States may succeed in blocking much of Iran’s 2.7 million barrels per day.
In May, the U.S. retreated from a multilateral deal with Iran regarding its nuclear disarmament program, and imposed sanctions to limit the world’s fourth largest oil exporter’s access to global markets.
“We are making meaningful changes to our supply forecasts: we see lower output from Iran, Libya and Angola ahead, but increase our forecasts for Saudi Arabia,” wrote Martijn Rats, equity analyst at Morgan Stanley. “On balance, this leaves the oil market tighter than before, with less spare capacity.”
Spare capacity, especially from OPEC countries, is an important measure by analysts to determine major oil exporters’ ability to respond to rising demand. The International Energy Agency estimates OPEC’s spare capacity could fall in to around 2.5 mbpd (excluding Iran) – by the first half of 2019, its lowest level since the end of 2016 when record production from the Middle East reduced spare capacity to around 1.9 million bpd.
The U.S. government is lobbying Iranian oil importers, including China and India, and “asking them to go to zero, absolutely yes,” according to a U.S. State Department official, noting that some key Iranian customers may be pressured into complying with American demands.
“On China, India — yes, certainly. Their companies — their companies will be subject to the same sanctions that everybody else’s are if they engage in those sectors of the economy that are sanctionable, where there were sanctions imposed prior to 2015,” the unnamed U.S. State Department Official told the media on June 26. “And yes, we will certainly be requesting that their oil imports go to zero, without question.”
Oil prices climbed down from their 3 ½ year high to reach US$73 per barrel, with Brent trading at US$76.96 Tuesday afternoon.
Paradoxically, U.S. President Donald Trump, with one eye on the U.S. driving season ahead of the U.S. 4th of July holiday, has been grumbling about high oil prices and on Jun.30 tweeted that he had directly asked Saudis to open the taps to make up for the shortfall.
“Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction (sic) in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to (sic) high! He has agreed,” Trump tweeted on June 30.
Donald J. Trump?@realDonaldTrump
Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to high! He has agreed!
Norway-based Rystad Energy expects Iranian production to drop by 700,000 bpd by December 2018.
“There are indications that Iranian oil exports have already begun dropping during the first half of June, mostly to Europe. We also expect Venezuelan production to decline a further 150,000 bbl/d towards year-end, with risks still skewed to the downside,” Bjørnar Tonhaugen, vice president of oil market research at Rystad Energy, said.
Trump’s move comes as the world suddenly finds itself dangerously short of meeting rising global demand that’s set to hit 100 million barrels per day by the fourth quarter, compared to 98.7 million during the same period last year.
Apart from Iran, Venezuela, Libya and Angola are also facing chronic production issues.
Venezuelan production fell to 1.36 million bpd by June, compared to just under 2.5 million bpd at the start of last year, amid a structural underinvestment in the country.
An International Energy Agency scenario projects oil production falling by around 1.5 million bpd due to the loss of Iranian and Venezuelan oil.
Meanwhile, Libyan supplies are down by as much as 350,000-bpd after the closure of the country’s two biggest ports, while Angolan production has also been falling due to chronic underinvestment.
Adding to the constraints is the short-term shutdown off Suncor-majority owned Syncrude until at least the end of July due to a tripped power transformer. The facility produced 253,000 bpd on average last year.
At their meeting in Vienna last month, OPEC countries and key ally Russia said they will raise production by a million barrels per day, but analysts are concerned it may not be enough for oil prices to spiral out of control, at least until new U.S. shale production comes on stream.
While OPEC leader Saudi Arabia will pick up the slack, Morgan Stanley believes oil markets will be undersupplied by around 600,000 in the second half of 2018.
“Also, taking a broad range of estimates from IEA, EIA and others, Saudi held spare capacity in the range of 1.3 – 2.1 mb/d when oil production was ~10 mb/d. If production increases as we now forecast, a large share of this would be eroded, leaving the global oil market with a limited ‘margin of safety’,” said Morgan Stanley’s Rat.
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