Crude oil at $60/bbl not the ‘new normal’ – IEA

LONDON (ICIS)–Recent gains in crude oil values, which have put prices at plus $60/bbl, may not last if the factors driving price rises – namely, geopolitical tensions in the Middle East – prove to be temporary, the International Energy Agency (IEA) said on Tuesday.

The Paris-based Agency said the recent events in Saudi Arabia – a crackdown on corruption which left more than 200 arrested for questioning, including princes – had added extra momentum to prices, but questioned whether that would continue in coming months.

Other factors which could have influenced higher prices have been lower crude oil production during September in the US, Venezuela, Mexico, the North Sea, Nigeria or Algeria.

Moreover, the IEA called into questions remarks by some crude oil players – including the 14-country producing cartel OPEC – that the market is actually rebalancing, which in their view would be the main reason for rising prices.

“These supply disruptions [in several countries], geopolitical concerns, a growing expectation that the OPEC/non-OPEC output accord will be extended through 2018 at the end of the month, and with demand growth still robust, largely explain firmer prices,” said IEA.

“Does it mean the market has found a ‘new normal’ where the accepted floor might have moved from $50/bbl to $60/bbl? This might be a tempting view, assuming supply disturbances will continue and tensions in the Middle East will not ease.

“However, if these problems do prove to be temporary, a fresh look at the fundamentals confirms the view we expressed last month that the market balance in 2018 does not look as tight as some would like, and there is not in fact a ‘new normal’.”

In fact, the monthly report published by IEA on Tuesday would back that theory up as it lowered its crude demand forecast for the whole of 2017 and 2018, by 50,000 bbl/day and 190,000 bbl/day respectively.

Moreover, the revision for 2018, while “not very large” on average for the full year, came mostly on the back of lower-than-expected demand in the fourth quarter, which would come 311,000 bbl/day lower.

“This is partly because of northern hemisphere heating degree day numbers for the early winter season, revised demand data for some Middle East countries e.g. Iraq and Egypt, and modest changes elsewhere,” said IEA.

“We have also taken general account of prices rising, in broad terms, by about 20% since early September. For 2018, our demand outlook has been adjusted to reflect a lower estimate for heating degree days in the early months plus some impact from higher prices.”

IEA said that if current levels of OPEC production were maintained, the oil market would face a “difficult challenge” during the first quarter of 2018 on the back of supply exceeding demand by 600,000 bbl/day followed by another, smaller, surplus of 200,000 bbl/day in the second quarter of the year.

“The reality is that even after some modest reductions to growth, non-OPEC production will follow this year’s 700,000 bbl/day growth with 1.4m bbl/day of additional production in 2018 and next year’s demand growth will struggle to match this,” said the IEA.

“This is why, absent any geopolitical premium, we may not have seen a ‘new normal’ for oil prices.”

Pictured: a satellite image of the Arabian Peninsula
Source: Planet Observer\UIG/REX/Shutterstock