Another weekly plunge in US crude inventories produced an uptick in crude prices midweek,but the momentum fizzled out soon after. OPEC as well as the International Energy Agency reported a drop in commercial oil inventories in the OECD countries in June, but failed to revive crude’s rally. And yet, the spread between front- and second-month ICE Brent futures flipped into backwardation this week, typically the sign of a tight market. WTI remained firmly in contango. We believe Brent’s backwardation stems from transient factors propping up the North Sea market rather than being a signal of an imminent rebalancing of global supply and demand. Is OPEC giving up? Not only was its July compliance with the production cut agreement the worst so far, but prominently, Saudi Arabia, which had been reducing output beyond its commitment, also over-produced, for the first time ever.
Crude’s rally since late July, which rescued it from seven-month lows and propped Brent comfortably back above $50/barrel, lost steam this week. That was not from any particularly bearish news, as much as the absence of support aside from a surprisingly large US weekly crude draw of 6.45 million barrels reported by the Energy Information Administration.
The latest monthly market reports from OPEC and the International Energy Agency this week both pointed to a decline in OECD oil inventories in June. They were also close on the size of the drop, pegged at 22 million barrels by OPEC and 19.3 million barrels by the IEA, but the data failed to lift market sentiment.
OECD crude and product inventories may have finally started to ease after six months of hefty OPEC/non-OPEC output cuts, but remained 252 million barrels above their five-year average according to OPEC, and 219 million barrels above as per the IEA.
A decline in oil inventories is what OPEC has been targeting with its production cuts in collaboration with non-OPEC and what the market has been anxiously waiting to see, but the June dip was too little too late. It came on the back of a seasonal spike in consumption, and may have seen a repeat in July, going by the IEA’s preliminary estimates. But the question is, will it sustain through the third quarter, traditionally a period of slow demand between the summer and winter peaks?
OPEC and the IEA also revised up their estimates for 2017 global oil demand growth this week — to 1.37 million b/d and 1.5 million b/d year-on-year respectively — extrapolating from a stronger second quarter in the OECD and counting on higher global economic growth this year.
But the oil market has been left contemplating the dichotomy between forecasts of robust demand growth, which may or may not come to pass, and burgeoning supply from OPEC and the US, which is undeniably evident. The market rebalancing narrative is still weak, putting crude in no-man’s-land: not quite ready to be claimed by either the bulls or the bears.
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Headline crude prices for the week beginning 10 February 2020 – Brent: US$53/b; WTI: US$49/b
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