The oil price is weakening because of fears of a supply glut next spring, Chris Weafer, senior partner at Macro-Advisory in Moscow, told New Europe on October 30.
Despite US sanctions on Iranian exports that are due to come into force on November 4, oil prices dropped again. On October 30, Benchmark Brent crude oil LCOc1 was down 70 cents a barrel at $76.64. US light crude CLc1 was down 50 cents at $66.54, Reuters reported, noting that both contracts have recovered ground over the last week but are around $10 a barrel below four-year highs reached in the first week of October.
“There is an expectation that the US sanctions aimed at cutting off all Iran oil exports will not, or cannot, be tightly enforced. So not all, or even substantially all, of Iran exports will be lost,” Weafer explained.
Moreover, US oil production has been rising steadily as the price of crude rose this year, he said.
In the October Oil Market Report, the International Energy Agency (IEA) forecasts that in the second quarter of 2019 average US production will be 1.25 million barrels greater than it was in the second quarter of 2018. “That covers all of the expected increase in global demand for next year,” Weafer said.
In addition production from the Organization of Petroleum Exporting Countries (OPEC) is also rising. “Average production in September was almost 500,000 barrels per day greater than in July and 700,000 barrels more than the Q2 average, Weafer said, adding that Libyan production has recovered to over one million barrels per days and Venezuelan output has stopped falling.
“So, unless there is a major supply outage over the winter then there will be excess oil supply in the spring. How tightly the US is able or willing to enforce the ban on Iran exports, and how Tehran responds to any such enforcement, may well be a critical factor. But it really is all about the supply side of the equation,” the Macro-Advisory expert said.
Oil is also under pressure from rising output by Russia and Saudi Arabia. Reuters quoted Russian Energy Minister Alexander Novak as saying on October 27 there was no reason for Russia to freeze or cut its oil production levels, noting that there were risks that global oil markets could be facing a deficit.
Asked whether Moscow’s position was weakening the oil price, Weafer told New Europe that Russia is again a bystander in the oil market, albeit one that is making a great deal of money from current prices. “The Russian federal budget will balance this year at $53 per barrel – it needed $115 per barrel pre-sanctions in 2013 – and, with an average of $75 per barrel, the budget will run a surplus of approximately $25 billion this year. It means the government does not have to borrow money externally for years to come,” he said.
He explained that production restraint made a great deal of sense for Moscow in late 2016 in order to boost the oil price and, with it, Russian budget revenue. “That phase is now over and the Russian oil companies are pumping at maximum. Average daily output in September was 11.37 million barrels per day, a post-Soviet record, and 370,000 barrels more than the May average when the Russia-OPEC deal ended. It is also near the maximum, which is probably 70-100,000 barrels higher, at best, over the next six months,” Weafer said. “Therefore, Moscow did what made sense for the budget back in late 2016 and is now reaping the rewards. It does not have to make any further adjustments,” the Moscow-based expert said.
Russia’s best course now is to stay on the sidelines and see what happens after US sanctions on Iranian exports come into force on November 4 and also to see what happens with the US and Saudi output over the winter months, Weafer said, noting, “Cutting production again would boost the oil price temporarily but would also help US producers gain more global market share and that is not is neither Moscow or Riyadh’s long-term interest.”