Crude Drops 4% On the Week, More Losses Friday as IEA Drops Demand Forecast

Friday October 12, 2018

A declaration from the International Energy Agency that the world oil stocks are healthy and the outlook for demand is weakening dealt another blow to crude prices on Friday, albeit much softer than the losses incurred earlier this week: Brent fell 26 cents to $80 per barrel, while West Texas Intermediate gained 37 cents to settle at $71.34 per barrel.

Numbers crunchers said Brent was on pace for a 5 percent weekly drop, while WTI posted a 4 percent loss this week.

The IEA's latest monthly report, released Friday, stated that the market looked "adequately supplied for now" and trimmed its forecasts for world oil demand growth this year and next: "This is due to a weaker economic outlook, trade concerns, higher oil prices, and a revision to Chinese data."

Specifically, the agency cut its forecast of global oil demand growth by 0.11 million barrels per day (bpd) for 2018 and 2019 to 1.28 million bpd and 1.36 million bpd respectively.

It added that "The increase in net production from key suppliers since May of approximately 1.4 million bpd, led by Saudi Arabia, and the fact that oil stocks built by 0.5 million bpd in 2Q18 and look likely to have done the same in 3Q18, lends weight to the argument that the oil market is adequately supplied for now."

This was enough for Stephen Brennock, oil analyst at PVM, to warn that, "The bearish alarm bells are ringing for next year's oil balance as market players brace for the return of a supply surplus."

Such disclosures from a respected agency, combined with persistent signs throughout this week that the crude industry could compensate for losses of Iran exports without incurring undue tightening, seemed to baffle media that for the past few months had been predicting calamity due to the U.S. sanctions against the Islamic republic.

Neil Atkinson, head of oil industry and markets division at the IEA, seemed amused as he hammered home his organization's findings; he told Bloomberg television that there has been "a very large increase" in supply from various producers ever since the U.S. sanctions against Iran were first announced, "so at the moment there's plenty of oil on the market"; but with issues such as lack of supply in Venezuela and other factors, "we are running very close to maximum capacity in the industry."

He added that because the industry "is running flat out, it is likely to mean that prices will be supported at relatively high levels."

As for 2019, Atkinson said an oversupply "is possible" but the outcome of Iran and Venezuela would have to be determined: "A lot could happen between now and 2019."

Atkinson also took a shot at the jittery trading community when asked about the discrepancy between the heights traders think crude will go and producers insisting there's not enough demand to warrant huge output increases: he said, "They live in a world of their own.

"We look at the fundamentals, and at the moment there is plentiful supply, and at the moment we have seen a modest downgrade to demand growth, and we think the likelihood is that if we are to change our demand outlook for 2019, it's more likely to be the downside than the upside."

So far, indications that the global crude market is more resilient than some analysts think include: U.S. producers resuming operations almost immediately after Hurricane Michael; the Organization of the Petroleum Exporting Countries boosting output and promising the ability to produce much more; Saudi Arabia claiming it already has set itself up to cover any Iranian shortfalls; and Russia along with other non-OPEC countries gearing up to produce in record volumes.

But the skepticism of some analysts is persistent, and earlier this week both Gunvor Group and Trafigura Group Pte. worried that the loss of Iranian oil could cause prices to reach $100 or higher either by year end or next year.