The recent drop in oil prices by around $10/b is a welcome change and gives breathing room to oil consumers, but the market is not out of the woods yet and the coming months will be very challenging, Fatih Birol, executive director of the International Energy Agency, said Tuesday.
In Asian trading hours, December ICE Brent crude futures were trading at $76.69/b, down nearly 1% from Monday’s close. In early October Brent crude had crossed the $86/b mark on the back of geopolitical tensions, its highest since 2014.
“We are going through very challenging times in oil markets,” Birol said, citing three important factors at play: oil demand that is still very strong despite signs of slowing growth, supply constraints like Iranian exports in decline and Venezuelan production in freefall, and tightness in markets as Saudi spare capacity has shrunk.
Saudi Arabia’s spare production capacity, the key cushion in the global oil market, has fallen to levels that are very worrying, Birol told reporters on the sidelines of the Singapore Energy Conference. “I have the confidence that other producers will come in the picture, especially the Gulf countries, and comfort the markets,” he said.
Markets have been concerned about Saudi spare capacity for several weeks, with the kingdom under pressure from the US to raise crude output to cool rising prices. Earlier this month it said it was pumping 10.7 million b/d, near its all-time high.
Once Saudi Arabia’s crude production reaches 11 million b/d, the kingdom’s spare capacity will be at the lowest level since it stood at 1 million b/d in January 2006, according to Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp.
US SHALE AND IRANIAN CRUDE
Birol said the fourth quarter will be challenging for oil markets until US shale exports increase after overcoming pipeline capacity challenges in about six to eight months. But he also said that US shale is one of the “completely new and major factors” that will bring volatility to oil markets in the longer term.
“US shale is very price elastic and we will see a substantial amount of oil from the US continue to flow into global markets,” he said. While oil prices were largely driven by OPEC’s output cuts in the past year, in 2019 they will be determined by US shale, demand from new consumers led by India and the return of geopolitics, resulting in volatility that is not good news, he said.
“India is, not only in oil but also in energy, moving to the center stage of global energy affairs rapidly, especially with the current government making the right energy policies,” Birol said.
“It is true that India is getting a considerable amount of oil from Iran. We will see how India and other countries importing from Iran will behave in the months to come,” he said.
Last week, Press Trust of India reported that Indian oil companies had placed orders with Iran for November crude supply, citing Sunjay Sudhir, joint secretary for international cooperation at the Ministry of Petroleum & Natural Gas. Birol said Iran’s exports have seen a significant decline from the last peak of about 2.4 mb/d and will continue to decline through November 5, when US sanctions on Tehran’s petroleum exports resume.
“The level of the decline is something we are not sure how low it will go. But the direction is clear,” he said. Platts.com
