Oil traders continue to look beyond the escalating U.S.-China trade war, bidding up oil prices as they watch tightening inventories.
Crude prices have gained this week on the back of a questionable hope that the U.S. and China may dial down the trade war, but also because of some more familiar movements in EIA data. The agency showed a massive 10-million-barrel drawdown in crude oil stocks last week, significantly more than the market had assumed. Unlike in prior reports that tended to offer mixed signals, this one also showed a 2.1-million-barrel drop in gasoline inventories, and a similar-sized drawdown in distillate fuel stocks. Putting it altogether, it was a decidedly bullish report.
That eased concerns, at least temporarily, that the slowing global economy would leave the market suffering from a surplus.
“Oil markets are broadly balanced at the moment, benefiting from the typical seasonal acceleration in demand,” said Martijn Rats, global oil strategist at Morgan Stanley.
The EIA data added some evidence to the prevailing forecasts from major market watchers that the supply/demand picture is set to tighten in the second half of the year. For instance, the International Energy Agency (IEA) currently sees oil demand growing by 1.1 million barrels per day (mb/d) in 2019. But in the first five months of the year, demand only grew by 520,000 bpd over the same period a year earlier.
In order for the full-year forecast to bear out, demand needs to dramatically accelerate in the second half of 2019. The IEA projects year-on-year demand growth on the order of 1.2 mb/d in the third quarter and 1.9 mb/d in the fourth. The fourth quarter figure looks larger than might otherwise be the case because demand dipped in the fourth quarter of 2018, making the year-on-year forecast look abnormally large. Nevertheless, the point is that the agency is banking on a strong global economy and strong demand to tighten up oil market balances in the last few months of 2019.
The agency acknowledged the shaky foundation of this forecast, not least because the U.S.-China trade war could send the global economy into a recession. “The outlook is fragile with a greater likelihood of a downward revision than an upward one,” the IEA said in its August Oil Market Report. “In the meantime, the short term market balance has been tightened slightly by the reduction in supply from OPEC countries.”
The IEA said that cuts from OPEC+, led by strong reductions from Saudi Arabia, will lead to inventory declines in the second half of 2019. “In a clear sign of its determination to support market re-balancing, Saudi Arabia’s production was 0.7 mb/d lower than the level allowed by the output agreement,” the IEA said earlier this month. “If the July level of OPEC crude oil production at 29.7 mb/d is maintained through 2019, the implied stock draw in 2H19 is 0.7 mb/d, helped also by a slower rate of non-OPEC production growth.”
For now, OPEC+ countries are doing their part. Even Russia has signaled its ongoing support. “Russian Energy Minister Novak has reasserted Russia’s commitment to OPEC’s voluntary production cuts. Good production discipline in OPEC+, coupled with good demand, is likely to support the oil price,” Commerzbank said in a note on Wednesday.
WTI has rebounded to the mid-$50s and Brent has climbed back above $60 per barrel for the time being. But unless the global economy resumes stronger growth, it all may turn out to be temporary affair, something even forecasters at OPEC and the IEA acknowledge.
Market tightness is a “temporary phenomenon because our outlook for very strong non-OPEC production growth next year is unaltered at 2.2 mb/d. Under our current assumptions, in 2020, the oil market will be well supplied,” the IEA said in its August report. “Well supplied” is a very diplomatic way of referring to rather sizable glut that looms for 2020.