August 10, 2018 • Reprints
Global stock markets are rattled as the President of Turkey, Recep Tayyip Erdogan, is running his economy into the ground, raising contagion fear surrounding other European nations. Initially, crude oil was following the stock markets down, but then turned positive on a report from the normally more bearish leaning International Energy Agency (IEA), which is warning that as oil sanctions against Iran take effect, perhaps in combination with production problems elsewhere, maintaining global supply might be very challenging and would come at the expense of maintaining an adequate spare capacity cushion.
The IEA also raised its demand forecast for next year. So, the oil market must balance the risk of shortages if the global economy does not fall apart, or a well-supplied market if it does if it falls apart. I guess for oil, it is “pick your poison.”
Suggesting that increased production from OPEC and Russia was providing some calm, but as Iran sanctions start to set in, that could just be the calm before the storm. The IEA said that concerns about the stability of oil supply have cooled down somewhat, at least for now. We have seen increases in production, mainly in Saudi Arabia and Russia, a surge in U.S. exports in June that saw a record weekly average level of 3 mb/d, and a partial, but fragile, recovery in Libya. Ample supply has contributed to the Brent price falling from just over $79 per barrel at the end of June to below $72 per barrel earlier this week. This cooling down in prices is clearly welcome for consumers. The biggest single product market in the world is U.S. gasoline and the national average price increase seen during the spring seems to have stalled for the time being.
Yet, warning about growth from the International Monetary Fund (IMF), and the IEA and now Turkey’s economic issues, could cause more problems for Europe. Sky News reported that Turkish President Recep Tayyip Erdogan has brushed off the plunging value of the lira and a rift with the United States, telling Turks: “If they have their dollars, we have our people, our God.” Turkey’s currency hit a record low against the U.S. dollar and euro early on Friday, falling around 7% against the dollar after initially losing 12%. Markets are worried about a deepening fallout between Washington and Ankara over the detention of U.S. pastor Andrew Brunson on terror charges, as well as other issues, according to Sky.
Still, if Turkey does not bring down Europe, we are going to have a dangerous tight global oil and product market. The IEA says that following strong demand growth in 1Q18, in 2Q18 and 3Q18, the pace has slowed dramatically to a relatively subdued 1 mb/d. In 4Q18, IEA expects a rebound and demand will be 100.2 mb/d. For 2018, IEA global demand growth outlook is unchanged at 1.4 mb/d. In 2019 growth accelerates slightly to 1.5 mb/d, but there are risks to the forecast from escalating trade disputes and rising prices if supply is constrained.
Global oil supply rose by 300k b/d in July to 99.4 mb/d, 1.1 mb/d above a year-ago. Compliance with the Vienna Agreement eased to 97% in July as output cuts were relaxed. Non-OPEC production is expected to grow by 2 mb/d in 2018 and by 1.85 mb/d next year.
OPEC crude oil output was steady in July, at 32.18 mb/d. An unexpected decline in Saudi Arabian supply was offset by higher production from the UAE, Kuwait and Nigeria. OPEC compliance was unchanged in July at 121%.
The IEA says that OECD commercial stocks fell seasonally by 7.2 mb in June to 2 823 mb and were 32 mb below the five-year average. Stocks at the end of 2Q18 were up 6.6 mb versus end-1Q18, the first quarterly increase seen since 1Q17. Outside the OECD, inventories were also mostly higher during the quarter.
The IEA also pointed out that record high temperatures are causing various disruptions, low water levels in the Rhine are hampering barge traffic, refinery operations are impacted in certain locations, warm water is affecting nuclear power plants and air-conditioning demand is soaring. Record temperatures are unlikely to significantly influence road and air transport demand one way or the other as holiday plans were typically made many weeks or months ago, but the sunny weather might provide a short-lived, modest boost. New data will show us in due course. Natural gas is oversold.