Crude oversupply to soften despite weak global growth - OPEC

12 September 2016 12:01 Source:ICIS News

Crude oil is being unloaded from an oil tanker on a quay in Zhoushan city, east China

LONDON (ICIS)--Crude oil markets might reduce supply-demand imbalances in coming months, as some major economies have posted better-than-expected demand despite moderate global economic growth, the Organization of Petroleum Exporting Countries (OPEC) said on Monday.

Crude oil prices witnessed a rally during August, although they softened towards the end of the month, after publication of figures showing a larger-than-expected build in US crude stock and worries about China’s demand as the country transitions to a consumption-based economic model.

“Despite moderate global economic growth, recent data shows better-than-expected oil demand in some of the main consuming countries,” said OPEC.

“This, along with a potentially improving oil supply picture, would contribute to a reduction in the imbalance of market fundamentals in the coming months.”

However, global growth remains subdued and political uncertainties haunt economic performance. OPEC said in Europe, the consequences of the UK’s vote to leave the EU are still unclear but it “seems the real economy is starting to be impacted.”

Compared to its Monthly Oil Report published in August, OPEC downgraded its GDP growth projections for the global economy as the US and Japan see their forecasts cut.

The world economy is expected to expand by 2.9% in 2016, down from the 3% forecast in August, and 3.1% in 2017, unchanged.

Meanwhile, the US is expected to see a reduction GDP growth this year at 1.5%, down from the 1.7% predicted in August, and 2.1% in 2017, unchanged.

“Given the slowing recovery in the labour market and weakening lead indicators, the trend in US growth will need close monitoring,” said OPEC.

Japan’s economy is forecast to expand this year by only 0.7%, down from 0.9% compared to OPEC’S last projection, and by 0.9% in 2017.

The 19-country eurozone’s projections are unchanged at 1.5% GDP growth in 2016 and 1.2% in 2017, although the wider EU (28 countries) might witness political uncertainty, affecting the economy, on the back of the departure from the bloc of the UK, according to OPEC.

OPEC also said the rebound in several UK economic indicators in August – like manufacturing, construction or services, from which 80% of the country’s output is created – might mislead projections as everything is yet to unfold regarding the so-called Brexit.

“Indicators point at a recovery in economic activity in the past weeks, but it remains to be seen how the situation will play out in the coming quarters. There is still no definite plan on how to enact the vote,” said OPEC.

“While consumption is holding up well and no large negative impact from business has become visible in economic measures yet, it seems the real economy is starting to be impacted.”

The crude-producing cartel kept is projections for UK GDP growth unchanged from his forecast issued immediately after the referendum in June, expecting growth to stand at 1.5% in 2016 but at just 0.4% in 2017.

The main four emerging economies will post a mixed picture in GDP growth, as China and India will grow in 2016 by 6.5% and 7.5%, respectively, but Brazil and Russia will still be in recession during the year, with negative growth of 3.4% and 0.8%, respectively.

In 2017, both countries will leave their recessions behind but only to post moderate GDP growth at 0.4% in Brazil and 0.7% in Russia. China and India will expand their output by 6.1% and 7.2% during next year.

“Numerous uncertainties for global economic growth in the second half of 2016 and in the coming year remain. Among these uncertainties, policy issues across the globe – ranging from elections in several countries to fiscal policy decisions – bear considerable weight,” said OPEC.

“Additionally, monetary policy decisions will require close monitoring in the near term. It is expected that the US Fed will further push back a decision on raising  interest rates, while the central banks in Europe, the UK, Japan, and China will maintain their relatively more accommodative stance.”

The crude-producing cartel also said the sharp decline in investments in the energy sector, mainly oil and gas, is causing a “negative impact” in global growth which so far has not been compensated by domestic consumption.

Oil prices, which have flirted with the $50/bbl mark in recent weeks, have found support from “speculation that oil producers [OPEC] might agree to curb output” at a meeting later this month in Algeria, an agreement which could include non-OPEC Russia, according to analysts.

“Oil prices were also supported by forecasts that the oil market would tighten in 2H16 [secondt half of 2016], amid an expected healthy draw in global oil stocks and a more balanced market in the next few months, thereby helping to ease excess supply,” said OPEC.

“The short-lived rally was further driven by short covering by speculators, including hedge funds and other money managers, who had amassed record short positions. In addition, a weak dollar provided support to oil.”

Pictured above: Crude oil is being unloaded from an oil tanker on a quay in Zhoushan city, east China's Zhejiang province.
Source: Imaginechina/REX/Shutterstock

By Jonathan Lopez