Adedapo Adesanya
By Adedapo Adesanya
Oil prices were rising Monday morning and some analysts see positive signs for the market in the weeks ahead as higher gasoline demand could stop oil’s recent slide. But in the longer-term, the oil market looks increasingly bleak.
From past years, August is traditionally a strong month for the oil market, because high summer demand usually sops up excess supply. Not this year. Demand has been weak and supply has not fallen enough, despite sanctions against Iran that have taken about 2 million barrels of oil production per day off the market—that’s out of about 100 million barrels of global demand.
According to an analyst, Neil Beveridge, in the first seven months of the year, global oil inventories in OECD countries grew by about 100 million barrels, implying an oversupply of about 0.5 million barrels per day. China has been stockpiling crude and Iran has been holding supply in tankers as the countries deal with sanctions. And demand has been hurt by the U.S.-China trade war and weak economies throughout the world.
On Friday, the International Energy Agency reduced its global oil demand expectations, to 1.1 million barrels per day this year and 1.3 million next year, a reduction of 100,000 and 50,000 barrels, respectively, after “very sluggish” growth in the first half of the year.
Oil may not head straight down, however. in the short-term, prices are likely to stop falling, Beveridge predicts.
“With OPEC exports continuing to decline and peak driving season in full swing, we expect sizeable inventory draws in August which should be price supportive in the near term,” he wrote.
And for the moment, short interest isn’t really a problem either. “Given the asymmetry behind the geopolitical backdrop, few market participants are willing to stomach the risk profile of outright shorting the oil market,” RBC Capital Markets analyst Michael Tran wrote. Shorts are staying away because of the risk that an international incident—like in Iran— could cause prices to spike.
But the long-term outlook for oil bulls is bleak. Supply is expected to far outpace demand in 2020. OPEC, which has already cut production to boost prices, will have to decide whether to cut production further to keep prices from falling more next year.
Currently, supply is expected to grow by 2.2 million barrels per day, while demand could rise at just 1.2 million barrels, Beveridge predicts. And that could end up being optimistic.
“A weaker global economy could result in downside risks to this figure,” Beveridge wrote. “This could lead to substantial inventory builds in 2020 which could push oil back to marginal cash cost.”
On Monday, Brent Crude was trading at $58.53 per barrel, the West Texas Intermediate (WTI) Crude was at $54.83, and the Nigerian Crude, Bonny Light was trading at $59.55 per barrel.
