Price movement
Prices on the low despite US sanctions
Oil prices spiked at the beginning of October to a four-year peak, with Brent Crude at around US$85 per barrel on worries over stretched global supplies due to US sanctions on Iran.
However, following this spike, prices came close to post their biggest monthly percentage decline since July of 2016 as rising production and the potential slowdown in energy demand outweighed expectations.
An important fact has been whether other producers will compensate the diminished supply. OPEC, led by Saudi Arabia, and other leading producers, Russia, agreed in early summer to rise crude production after over a year of reduction. Comments in recent weeks by the Saudis regarding their potential maximum production—reaching up to 11 million barrels a day—have further weighed on prices of late.
Examples to illustrate the supply and demand dynamic of the commodity.
The main change we have seen recently is about the market sentiment, partially due to increasing concerns about demand as a result of the trade conflict between the U.S. and China. However, “real demand data remained robust in September,” Commerzbank said[1]. On the supply side, producing countries have also played an important role, with crude oil inventories in the U.S. having risen significantly for several weeks. Saudi Arabia, Russia and Libya boosted up their oil production in a noticeable manner in October. The result of these actions is positive as oil producers seems to be successful in offsetting the supply outages coming from Iran and Venezuela.
The OPEC nations are struggling to fully deliver on the oil production increase of 1 million bpd promised in June, Reuters reported, quoting an internal OPEC document.
In comparison to May, Saudi Arabia ramped up its production by 524,000 bpd but in the meantime Iranian, Venezuelan and Angolan production fell nevertheless, the non-OPEC partners in the deal have significantly increased their combined production. Last September, Russian oil production reached 11.36 million bpd. As a whole, the country’s production has increased by 450,000 bpd since May, but part of that increase was counterbalance by a decrease in Kazakhstan, Mexico, and Malaysia.
Recommendations to be short (sell) or long (buy) for the next 3 or 6 months.
“There’s a sense that the global economy goes into a bit of a slowdown and demand in 2019 isn’t quite as robust as it has been over the past couple years,” said Brian Kessens, energy asset manager at Tortoise in Leawood, Kansas. “We are still in more of a risk-off sentiment.”[2]
In addition to demand side concerns, all eyes are on the impact of Iran’s sanctions, which are expected to come into effect on Nov. 4, with many believing that Saudi Arabia and OPEC will do what is necessary to fill any shortage supply.
Following every bit of information stated previously, we recommend to be short on the commodity as we fully trust in OPEC and other producers capacity to fill the gaps and prevent shortage.
Sources
Beals, Myra P. Saefong, Rachel Koning. « Oil on Track for Biggest Monthly Loss in More than 2 Years ». MarketWatch. Consulté le 1 novembre 2018. https://www.marketwatch.com/story/crude-oil-tips-higher-but-is-about-to-log-a-9-october-retreat-2018-10-31.
« Brent Crude Futures | ICE ». Consulté le 1 novembre 2018. https://www.theice.com/products/219/Brent-Crude-Futures/data?marketId=222467.
« Brent Futures Curve ». ERCE. Consulté le 1 novembre 2018. https://www.erce.energy/graph/brent-futures-curve.
« Crude Weighed Down by Global Economic Slowdown Worries », 31 octobre 2018. https://www.bloomberg.com/news/articles/2018-10-31/oil-set-for-biggest-monthly-decline-since-2016-on-growth-fears.
« Global Oil Demand and Supply ». ERCE. Consulté le 1 novembre 2018. https://www.erce.energy/graph/global-oil-demand-and-supply.
« In sign of supply flexibility, Russia wields oil stocks to boost output ». Consulté le 1 novembre 2018. https://www.cnbc.com/2018/07/19/reuters-america-in-sign-of-supply-flexibility-russia-wields-oil-stocks-to-boost-output.html.
« OECD / US Oil Inventories ». ERCE. Consulté le 1 novembre 2018. https://www.erce.energy/graph/oecd-us-oil-inventories.
« OECD / US Oil Inventories ». ERCE. Consulté le 1 novembre 2018. https://www.erce.energy/graph/oecd-us-oil-inventories.
« Russia’s Oil Output Won’t Go Much Higher ». OilPrice.com. Consulté le 1 novembre 2018. https://oilprice.com/Energy/Crude-Oil/Russias-Oil-Output-Wont-Go-Much-Higher.html.
« Urals Oil Price Charts ». OilPrice.com. Consulté le 1 novembre 2018. https://oilprice.com/oil-price-charts.
[1]https://www.marketwatch.com/story/crude-oil-tips-higher-but-is-about-to-log-a-9-october-retreat-2018-10-31
[2]https://www.bloomberg.com/news/articles/2018-10-31/oil-set-for-biggest-monthly-decline-since-2016-on-growth-fears