Crude Up and Demand Growth on Track, But Experts See Bearish Market Ahead

Friday March 9, 2018

Two days of crude price declines ended Friday with West Texas Intermediate closing 3.2 percent higher on the strength of Wall Street responding positively to strong U.S. jobs data - but nobody in the analytical community seem thrilled by the turnaround, citing everything from U.S. president Donald Trump to oil shocks as major concerns for the market moving forward.

WTI rose $1.92 to settle at $62.04 per barrel, while Brent rose $1.54 to $65.15 - the latter being a 2.4 percent gain; both benchmarks were also said to benefit from news that Libya's 70,000 barrels per day (bpd) El Feel oilfield stayed shut despite the Petroleum Facilities Guard saying it had reached a deal to reopen it.

John Kilduff, founding partner for Again Capital, pointed out that job additions in February "speaks to strong, underlying economic conditions, and growth, which includes increased energy demand."

Taking a far more muted tone was Jim Ritterbusch, president of Ritterbusch & Associates, who said in a note, "While this strong connect between oil and the macro is expected to continue, we are also seeing an increasingly bearish tilt to our short-term fundamental model"; he referenced Energy Information Agency estimates showing renewed upside acceleration as "coming closer to offsetting this year's demand that has generally been stronger than expected."

Ritterbusch was bearish despite Goldman Sachs earlier this week re-issuing its 2018 global oil demand growth forecast of 1.85 million bpd despite indications of a slight slowdown.

The bank stated in a note that demand weakness now seems to be occurring in the first quarter of the year instead of in the second as was traditionally the case, and "This new pattern suggests that while expectations for demand growth may be low for 2Q, the seasonal trough in demand may actually be already occurring, leaving oil demand growth to squarely surprise to the upside this spring."

There was plenty to worry about on a broader scale too, as far as PVM Oil Associates  and Exxon Mobil Corp. were concerned: Stephen Brennock, oil analyst at PVM, warned in an email that Donald Trump's threat to impose tariffs on metal imports were a "major threat" to crude demand and could trigger a "vicious cycle" of downward pricing pressures.

He reasoned, "Economic optimism and oil consumption go hand-in-hand, therefore, any adverse impact on the health of the global economy will dampen oil demand growth prospects … In short, a trade war would be a recipe for lower oil prices."

As for Exxon, Darren Woods, that company's chief executive officer, said in a presentation to analysts that if the economy falters, crude could tumble back to $40 per barrel, adding that economic expansion is what's "really driving demand at levels much higher than recent history."

Woods went on to note that "When that demand starts to tail off, if Permian production continues to rise, I think that you're going to see a different rebalancing of the market and OPEC [the Organization of the Petroleum Exporting Countries] will have to make some calls around how they want to manage that."

Earlier this week, BP predicted that the steadily increasing U.S. shale build will result in $50 to $65 range bound prices for at least a few years - but that demand would still be over 100 million bpd in 2040.