Oil markets are notoriously volatile but over the last six months, we’ve seen some big moves in both directions. Back in August for instance, Brent looked like it would smash through the $70 barrier, then sharply reversed course and hit a peak of $86 a barrel as investors started to realise that the new sanctions on Iran really would have an impact. In recent days that surge has lost momentum again and the price of oil is back around $75.
Fears about Iran are clearly providing a tail wind for oil prices. Most experts reckon that exports will be reduced by – 1.7mbd, falling below 1mbd for November & December. Nevertheless, there are also are some equally powerful headwinds at work. Crude stocks in particular are building and last week they grew by 6.3 mb against a consensus expectation of 3 mb.
What’s next? Westbeck Capital, for one, produces some highly informative monthly reports to investors, and although they’re obviously a tad biased to the buy side, they do contain some really rather insights into market dynamics and market gossip. In terms of headwinds Westbeck lists the following:
- “October is typically the time for peak refinery maintenance and petroleum stocks normally rebuild over this period. This year the downtime has been exaggerated as refiners prepare for the introduction of IMO 2020. “
- “Tanker rates have shot up close to +40% on certain routes (triggered by Iran idling its VLCC fleet for floating storage while Asian refiners started sourcing alternative crude from Europe, West Africa and the Gulf Coast, requiring longer journeys). This steep rise in tanker rates has temporarily closed the export arb from US to Asia as well as Europe to Asia. Meanwhile, the arb from the US to Europe is still open, and with US refiners on maintenance, a lot of crude is heading our way, weighing on Brent time spreads. “
- “Iran exports [are] surprising to the upside in the first 2 weeks of October: a number of tanker tracking companies peg Iran exports at ~2mbd (up from 1.8mbd in September). This partly reflects the US Administration making clear that sanctions will only affect crude lifted after 4 November (as opposed to clearing customs in the importing country after the 4 November). This has led a few customers to boost imports just ahead of the deadline.”
But it’s not all doom and gloom for oil prices.
The core structural driver here is that global demand is increasing at a steady rate – total demand last week increased by 350 kb/d. Westbeck’s own internal market models still assume [modest] demand growth globally next year of only +1.2mbd next year, and no supply disruption from Libya or Nigeria, “yet we still forecast a shortfall of around -400kbd in 2019”.
Westbeck also expects a “sharp tightening in the global crude markets in November & December [which] will coincide, post midterms, with significantly less tweeting from President Trump, however sharp the crude rally might be. OPEC+ countries led by Russia appear on the verge of formalising their arrangement this December, which collectively would encompass over 50% of global production”.
A sudden uptick in demand, coinciding with a sudden fall in inventories, could thus have an immediate impact on the oil price – the last rally in late summer put $16 on the price of oil.
If Brent pushes below $70 a barrel, I’d be a buyer of oil stocks again.