IEA cuts oil demand forecast

WTI Crude Oil

Daily July West Texas Intermediate Crude Oil

Output from conventional projects has until now been rising as projects started at the beginning of the decade have come onstream, but the cycle is turning - The Telegraph reports output will fall precipitously, by 1.5 million bpd in 2019. USA industry data was said to show crude inventories rose last week.

Brent crude hit $79.02 a barrel, a 79 cent increase, registering its highest level since November 2014.

OPEC figures published on Monday showed oil inventories in OECD industrialized nations in March fell to 9 million barrels above the five-year average, from 340 million barrels above the average in January 2017.

Members of the Organization of Petroleum Exporting Countries, including Saudi Arabia, Kuwait and the United Arab Emirates, said they have enough capacity to fill in any supply gap if renewed sanctions curtail Iran's exports.

Assuming that Iran sanctions reduce exports (estimates range from losses of 200,000 b/d to 1 Mbd), OPEC+ continues its agreement, and demand growth meets expectations, global oil markets will see a supply deficit this year.

"A couple of years ago there was a view that USA shale was Superman and that, basically, we wouldn't have to go back to the traditional producers and say, 'Put more barrels on in the event of a shortage.' But, again, now we have these infrastructure constraints and pipelines that are reaching capacity, the Trump administration has to appeal to traditional allies in terms of managing the market". WTI's discount to Brent was as much as $7.28, its widest since December 12 on surging US output.

Brent Crude
Daily July Brent Crude

Critically, the USA market is moving into its peak demand period, and this time of the year, inventories typically fall. Now, they are already 15 percent lower than year-ago levels, thanks in large part to OPEC's cuts specifically targeting the USA market.

Greater GDP growth has the potential to increase oil consumption beyond forecasted levels, which could put upward pressure on crude oil prices, and simultaneously drive systemic market movements in equities, bonds, and other commodities, which are often correlated with movements in crude oil prices. As the price for crude rises, consumers and businesses will feel the pinch as gasoline could exceed $3 a gallon by summer time.

Physical crude markets are sagging under the weight of unsold barrels of oil, while the 50-percent rise in the oil price in the previous year is encouraging major companies such as ExxonMobil, Royal Dutch Shell, Chevron, BP and Total to increase output.

So while $80 might be Saudi Arabia's purported magic number, its spell might prove short-lived.

The news that Total is planning to withdraw from its large Iran gas field deal has pushed prices steadily higher on Thursday. Saudi Arabia now has more than 2m b/d of excess production capacity, which it could activate in short order, but at the risk of taking market share from other producers' in the pact. It will take up to 180 days to allow Iranian oil customers and other companies involved in doing business with Tehran to make plans. Both the USA actions regarding Iran and the current tumult in Venezuela increase uncertainty about future supplies.

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