Mixed Messages on Oil Glut Fails to Dampen Thursday Trading or Bullish Big Oil Outlook

by Ship & Bunker News Team
Thursday December 14, 2017

Despite the International Energy Agency sending profoundly mixed signals about the true state of the crude market, West Texas Intermediate on Thursday settled up 44 cents to $57.04 per barrel while Brent rose 87 cents to $63.31 per barrel.

Analysts and other experts have spent the past year on one hand insisting the global glut is over and on the other worrying that producing nations are simply pumping too much for the market to absorb, and the IEA contributed to this schizophrenia by increasing its forecast for 2018 production by nations outside the Organization of the Petroleum Exporting Countries (OPEC) and simultaneously expressing confidence the cartel will significantly curb global oversupply.

The IEA pointed out that inventories in developed nations have fallen to their lowest level since July 2015; but in noting that U.S. crude output next year would climb by 870,000 barrels per day (bpd), up from its November forecast of 790,000 bpd, the agency stated, "On our current outlook, 2018 may not necessarily be a happy New Year for those who would like to see a tighter market; total supply growth could exceed demand growth."

The IEA then went on to state that the market would revert to a deficit of about 200,000 bpd in the second half, meaning 2018 overall would show "a closely balanced market."

Meanwhile, Michele Della Vigna, head of energy-industry research for Goldman Sachs Group Inc., offered her take on the market by declaring "It's a very exciting time: we're back to a concentrated market like we had in the 90s."

She predicted that companies from Royal Dutch Shell Plc to Exxon Mobil Corp. will in 2018 have a surplus of cash to fund dividends, dominate deep water mega-projects, and even win in tax negotiations with oil-reliant governments around the globe.

Bill O'Grady, chief market strategist at Confluence Investment, summarized the situation succinctly: "You've got a mixed bag of data, frankly," and he added that while U.S. crude inventories have been declining over the past four weeks, "you are seeing this really impressive build in gasoline."

John Kilduff, founding partner for Again Capital, explained Thursday gains amid the confusion by pointing out that  "At present you cant ignore the impact of the Forties pipeline outage; Its a significant amount of oil that the market is going to miss and is missing, and its almost surprising its not generating more support."

Kilduff was referring to the shutdown by Ineos of the North Sea pipeline due to cracks that are expected to take anywhere from several weeks to a month to repair, thus potentially removing as much as much as 13 million barrels of crude from the market.

The IEA's 2018 forecast seems to diverge from statements made by Mohammad Barkindo, secretary general for OPEC, who earlier this week in China declared that the market has been stabilized thanks to the cartel's efforts and that complete supply and demand rebalance will be achieved by the end of next year.