OPEC Output Hits 2018 High Amid Concern Over Slowing China Demand

OPEC output hits 2018 high. File Image / Pixabay

Even though the crude market of late has seen sporadic upward movement based largely on fear  that U.S. sanctions against Iran and weekly U.S. inventory draws herald a market tightening, it's hard to ignore fundamentals suggesting the reverse: and on Monday crude prices held steady as data revealed rising supplies and slowing demand.

West Texas Intermediate was unchanged at $69.80 per barrel while Brent inched up 20 cents at $77.84 per barrel, after it was disclosed that output from the Organization of the Petroleum Exporting Countries (OPEC) rose 220,000 barrels per day (bpd) in August to a 2018 high of 32.79 million bpd, thanks to a recovery in production from Libya, a modest rise in Nigeria, and Iraq pumping at record levels.

What's noteworthy about OPEC's August performance is that while production from the cartel's de facto leader Saudi Arabia edged up 10.48 million bpd, this was still intentionally lower than the kingdom's 10.60 million bpd showing for June - suggesting that if the Saudis decided to put aside worries about flooding the market and pump full out, OPEC could arguably put to rest persistent criticism that it isn't able to make up for shortfalls from Iran or Venezuela.

Traders on Monday apparently also took note of Baker Hughes reporting an increase in U.S. oil rigs for the first time in three weeks, adding two for a total of 862 rigs.

Still, worries persist that the market is due for a tightening anyway: Stephen Innes, head of trading for Asia-Pacific at OANDA, said Brent was "supported by the notion that U.S. sanctions on Iranian crude oil exports will eventually lead to constricted markets."

Edward Bell, analyst at Emirates NBD bank, added: "Iranian production is already showing signs of decline, falling by 150,000 bpd last month."

Azlin Ahmad, editor-crude oil at Argus Media, told CNBC that "Refiners have already started to cut imports of Iranian crude...the volumes are starting to fall, and added to that is the Venezuelan low production, so prices have gone up, [and] I think there is still potential for prices to go a bit higher because we haven't really seen the full impact of the sanctions on Iran."

But in the end, China could pull the rug out from under the feet of the market tightening camp: the oil ministers for Bahrain and Oman told CNBC on Monday that the nation's demand for oil could decline on the back of its trade dispute with the U.S.

Sheikh Mohammed bin Khalifa Al Khalifa, oil minister for Bahrain, said, "I think there is a risk on the demand side; obviously the trade issue is going to impact demand in a negative fashion if it continues, [and] you've got the strong dollar, which is another factor."

Mohammed bin Hamad Al Rumhy, oil minister for Oman, remarked, "There is a danger that the demand will be impacted as well: people often focus on the supply side - what happens if Iran stops supplying - but what happens if China reduces its consumption?"

Oman is a principal supplier of oil to China, with the latter buying almost 90 percent of its exports last year.

Indeed, China, which has suffered economic hiccups irrespective of the U.s. trade wars, may be something to watch out for: its crude imports recovered slightly in July after falling for the previous two months, but the imports were still among the lowest this year due to a drop-off in demand from the country's smaller independent refineries.