A day is a long time in world oil

On 13 June, two tankers were hit in the Gulf of Oman in attacks the US has attributed to Iran.

More than 17 million barrels a day (b/d) of Gulf oil passes through the area. You would have thought the news would have produced a sharp price spike. But in reality, oil prices went up by only 4 per cent.

The market was more troubled the following day by an International Energy Agency (IEA) report that oil demand in the second half of 2019 would be lower than previously forecast due to slowing world growth and the trade dispute between China and the US.

Rapidly growing global supply

The IEA, nevertheless, expects consumption to grow this year by 1.2 million b/d and by a further 1.4 million b/d in 2020, though some say it will revise its forecast later this year if economic prospects deteriorate further. Rapidly growing global supply is weighing most on the market. It is expected to increase by 1.9 million b/d this year and by 2.3 million b/d in 2020.

The IEA says 90 per cent of the additional output will be due to US producers. A report in June by Rystad Energy says the US could be pumping 13.4 million b/d by the end of 2019. Texas alone is soon expected to produce above 5 million b/d – more than any Opec nation except Saudi Arabia.

The single positive for producers hoping to avoid a fresh oil price slump is the renewal of the supply agreement between Opec and leading non-Opec nations including Russia. A fresh deal should be agreed in July, but Russia’s enthusiasm for output restraint is fading.

Outlook for 2020

The outlook for 2020 is more worrying. The IEA warns there is plenty of non-Opec supply potential and Opec nations have about 3.2 million b/d of spare capacity. That includes around 1.5 million b/d in Iran, where output in early June was less than 60 per cent of what it was last summer due to US sanctions.

The result is persistently intense oil price uncertainty. On 18 June, the Opec reference basket price was just over $61 a barrel, almost 20 per cent lower than it was less than 40 trading days earlier.

A further price slump is inevitable unless Opec and its partners, and Saudi Arabia in particular, are prepared to cut output. This could take total Opec production below 30 million b/d, its lowest level for 10 years.

But there are few certainties. As events in June demonstrated, a day is a long time in world oil.

Edmund O’Sullivan is a former editor of MEED

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