Crude Rises but No Spikes from Now On, Says IEA

Wednesday June 13, 2018

Disclosure by the Energy Information Administration that U.S. crude inventories plummeted by 4.1 million barrels in the week to June 8 caused a modest gain in oil prices on Wednesday - but they were accompanied by assurances that sharp price hikes are unlikely from now on, thus presumably alleviating concerns that costly oil hurts demand and global economic growth.

Following the release of the EIA's latest numbers, West Texas Intermediate climbed 28 cents to settle at $66.64, its highest closing price in nearly two weeks, while Brent was up 87 cents to $76.75 per barrel.

John Kilduff, founding partner at Again Capital, said of the EIA report, "The demand metrics here are amazing for crude oil and gasoline; put the exports of crude on top of that, and it's just a really bullish report."

He downplayed the disclosure that U.S. production rose to 10.9 million barrels per day (bpd) in the week, remarking, "It seems like we need almost every barrel of that to keep up with this refining demand."

But demand overall is the key factor in any debate over where crude prices are heading, and unfortunately nobody can agree upon whether the demand is strong or in fact vulnerable: for its part, the International Energy Agency on Wednesday left its oil demand growth forecast for 2019 largely unchanged, at 1.4 million bpd, similar to this year's level, but it warned of downside risks, including "the possibility of higher prices, a weakening of economic confidence, trade protectionism, and a potential further strengthening of the U.S. dollar."

Tellingly, the IEA's revised upward estimate for 2019 production growth of 1.7 million bpd outstrips demand growth, and it capped its calculations by remarking that "Prices are unlikely to increase as sharply as they did from mid-2017 onwards, and thus the dampening effect on demand will be reduced."

As far as U.S. president Donald Trump is concerned, not only are further price increases unacceptable regardless of their size, current prices are too much for American motorists to tolerate: on Wednesday he once again blamed the Organization of the Petroleum Exporting Countries (OPEC) for artificially inflating the value of both WTI and Brent, tweeting, "Oil prices are too high, OPEC is at it again; not good!"

Hossein Kazempour Ardebili, OPEC governor for Iran, attempted to capitalize on the brash billionaire's tweet by complaining that with regards to the U.S. sanctions imposed on his country and Venezuela, "You cannot place sanctions on two OPEC founder members and still blame OPEC for oil price volatility" - overlooking the fact that the price escalation of WTI and Brent began long before the U.S. decided to opt out of the Iran nuclear deal.

But the ability for OPEC to boost production is of concern to many pundits, including Pierre Andurand, hedge fund manager and founder of Andurand Capital Management: in response to Trump's tweet he wrote, "OPEC has the lowest spare capacity ever right now - there is going to be a real issue," and he predicted prices above $150 within two years.

Not only does Andurand's forecast prove that analytical assessments of crude's potential are all over the map, it demonstrates that even respected individuals such as he can be wildly inconsistent: in April Andurand said $300 oil is possible within a few years and that this would be a tremendous boon to much-needed industry investment.