Is The Oil Supply Glut Set To Return?

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By Nick Cunningham

Is the oil market tightening too much or is a glut on the verge of making a comeback?

There were a series of mixed messages from both OPEC and the IEA in recent days, offering a muddy outlook for the oil market. First was the TASS interview with Saudi oil minister Khalid al-Falih. His main message was that Saudi Arabia has enough spare capacity to cover for any shortfall related to Iran, although he noted that any further unexpected outages – from, say, Venezuela, Libya or Nigeria – would test the cartel’s abilities.

Libya appears to be doing its part for now. Mustafa Sanalla, the head of Libya’s National Oil Corp., said that Libya is aiming to increase production to 1.6 million barrels per day by the end of 2019, which would mark the highest level since the Arab Spring and civil war began in 2011.

Al-Falih remains confident that the market is well-supplied. But separately, he said that OPEC is in “produce as much as you can mode.” Meanwhile, a technical committee working within OPEC suggested that it would prepare options for 2019, which could include a production cut in order to prevent a supply glut from re-emerging. OPEC+ announced plans to increase production by 1 million barrels per day in June, but the deterioration of the global economy in recent weeks “may require changing course,” the committee said.

Despite his confidence in the TASS interview, al-Falih sounded a bit more concerned about too much supply when he spoke to Saudi media, admitting that he was worried about rising inventories. “We (have) entered the stage of worrying about this increase,” Al-Falih said. Indeed, the U.S. has seen a sharp increase in inventories lately. Crude stocks are up more than 28 million barrels since mid-September.

At the same time, the International Energy Agency is concerned about not having enough supply on hand. The head of the agency urged OPEC to increase production in December when the group meets. “Global oil markets are going through a very sensitive period — global economic growth as well,” IEA Executive Director Fatih Birol said in a Bloomberg interview in London Thursday. “If the oil producers care about the health of the growth of the global economy, which I believe they do, they should take the steps to further comfort the market.”

Birol said that without more supply, the global economy will enter a “red zone.” Birol conceded to al-Falih’s point that the oil market might be well-supplied right now, however “the next few months might be difficult if the producers don’t increase production or give the signal for it,” he said.

Meanwhile, the head of the IEA’s oil division, Neil Atkinson, warned on twitter that supply outages are still a concern.

Producers have already done a lot to ensure the market is well supplied but further likely falls in supply from Venezuela and Iran and ongoing uncertainty about Libya mean that more will be needed if we are to avoid damage to the global economy. https://t.co/QR8EVC9fq1

— Neil Atkinson (@NeilAtkinson58) October 25, 2018

The oil market seems to be at a confusing juncture, with supply outages and limited spare capacity threatening to send prices up, which in turn, would endanger the global economy. The flip side is that the market seems well-supplied, at least for now. Rising inventories and a slowdown in demand might even amount to leading indicators of a returning supply surplus.

Perhaps the Saudi oil minister’s shift in tone was strategic, coming in response to the recent fall in oil prices. Hinting at a supply glut, and possible OPEC action in response, could jolt oil prices back up. After all, Iran sanctions are about to take effect, which means supply is set to tighten in the next few weeks. “Thus the words of Saudi representatives can be interpreted as a signal that the country regards a price level of approx. $80 per barrel as comfortable, and would target this price level,” Commerzbank said in a note. “This makes the oil price a political issue once again, and as such can hardly be explained by fundamental developments alone. More pronounced price reactions to the daily news and increased volatility are therefore probable.”

Whether or not the oil market is out of balance – either because of too much supply or because of too little – is a matter of perspective. To some degree, that is always the case, but with so many mixed signals floating around the market, the outlook seems especially perplexing right now.

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