Oil: Why after worrying about a shortage, markets now fear an oversupply

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10/26/2018 | 04:30 pm
After many months of concerns about a shortage of supply, the oil market is now beginning to be concerned about a possible oversupply and inventories that are rising in many parts of the world.

Beyond Iran, which has monopolized all the attention in recent months, oil prices remain at the mercy of the slightest information that may or may not support the thesis of a chronic lack of supply in the coming years. As a tangible consequence, volatility is increasing, leading to intense profit taking. The price of Brent has thus dropped below USD 80, losing nearly 9% since the beginning of October.

Until now, the main focus in the oil market remained on U.S. sanctions, due to begin on Nov. 4., and the impact they are having on Iran's oil exports. Trump has said he wants to reduce Iranian oil sales to zero, although this looks highly unlikely.

But now, markets are starting to worry about an oversupply. Why?

Well, for starters, Saudi Arabia has warned about a possible oversupply. The kingdom’s OPEC governor said on Thursday that oil markets could face an oversupply by the end of the year. Saudi Energy Minister Khalid al-Falih even said there could be a need for intervention to reduce oil stockpiles after increases in recent months.

Supply is at record levels among the major producers. Saudi Arabia and Russia are meeting their commitments to increase production. They are each around 10.7 mbd, so the gates are largely open to compensate for market disruptions. The United States is also pumping at full capacity with a production of 11.2 mbpd, leading to an increase in stocks given that US exports are unable to keep up with the pace imposed by producers.

Source : US Energy Information Administration - (Click to enlarge)

Meanwhile, the slump in stock markets and concerns about trade raised fears around demand for crude oil. It may indeed grow slower than expected, thanks to the global economic slowdown resulting from a rise in protectionist policies. In this respect, the IEA and OPEC acted as whistle blowers in their latest report. OPEC is thus lowering its forecast for demand growth for 2019 by 50,000 bpd for the third consecutive month, while the IEA has reduced it by 110,000 bpd for 2018 and 2019.

Romain Fournier
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