The monthly report of the International Energy Agency (IEA) released Friday encapsulated why in the current market, you could have something like a possible attack on an Iranian tanker in the Red Sea – which happened the same day as the release of the Energy Information Administration release – and the market gets real excited, moves up, moves back down part of the way and then will probably just forget the whole thing in a few days.
As any veteran of the oil markets can tell you, an attack on an Iranian tanker off the coast of Saudi Arabia, possibly from Saudi sources, would have been met 15 or 20 years ago, or more, with markets that screamed higher. But since the U.S. shale revolution has taken hold, the nervousness of the market has subsided. And so has the reaction to incidents like what happened Friday.
But it isn’t just psychological. The IEA report spells out why there’s not a lot of reason to be worried about a supply shock. Yes, one could argue that a market that gets hit with two big international incidents over about four weeks – the attack on Saudi facilities September 14 and the Iranian tanker incident Friday – and doesn’t move higher is not adequately reflecting any sort of risk premium.
Maybe that will be proven correct; there are certainly plenty of analysts who would make that argument. As RBC Capital oil analyst Helima Croft told CNBC earlier this week, “Right now, the market is really discounting quite serious political risk in the largest production zone in the world [the Middle East] because they’re very concerned about demand.”
That’s where the IEA numbers come in. Here are the highlights from its most recent monthly report released Friday. Few if any of them could even remotely be viewed as pointing to higher prices.
– The first set of numbers, about 2019, are at least neutral. The IEA’s estimate on global oil demand growth in 2019 was cut by 100,000 barrels per day (b/d) to total average demand of 100.3 million barrels/day, an increase of 1.2 million b/d. The IEA does not project an estimate for global supply going forward because it doesn’t predict what OPEC is going to do. But the fact is total supply this year is likely to decline from 2018’s IEA level of 100.3 million b/d because OPEC slashed its own output by as much as 3 million b/d by the end of last year. Because of that – and this is mildly supportive to prices – it may be that even the 1.2 million b/d growth in demand this year that the IEA is forecasting could exceed the growth in supply for 2019, given the cuts made by OPEC and the Russia-led OPEC+ group of producers. Supply in the second quarter was 100.1 million b/d and 99.9 million b/d in the third quarter, though that latter figure was impacted in part by the loss of Saudi output at the end of the quarter due to the attacks. Given that there are still some Saudi constraints here in the fourth quarter, it seems likely that supply this year will average less than demand.
– But that’s this year. And the IEA, like other agencies that do long-range forecasting, are sticking to its forecast that shows a significant imbalance between supply and demand in 2020. Since the IEA doesn’t project OPEC supply, it replaces it with an OPEC “call,” which is the amount of oil from OPEC, plus stock changes, needed to balance supply and demand. To get it, the agency starts with an estimate of global demand; for next year, that’s 101.5 million b/d, up 1.2 million b/d over 2019. Then it subtracts a small category, the output of natural gas liquids – propane, butane, etc.– from that figure. Then it takes the big enchilada – estimated non-OPEC output. And that’s where OPEC’s problem comes in. The IEA (which is not alone in this bullish estimate) sees non-OPEC supply rising to 67 million b/d next year from 64.8 million b/d this year.
– Compare that 2.2 million b/d jump in non-OPEC supply to the 1.2 million b/d increase in demand and you can see the million dollar – or the million barrel – dilemma facing OPEC. It’s already cut anywhere from 2.8 million to 3 million b/d from its output a year ago. And it is now facing the need to reduce output maybe another 1 million b/d to keep the market from being significantly oversupplied. That’s at the heart of the bearish sentiment in the market. And despite all the concerns over U.S. production from a debt-saddled upstream sector, the weekly EIA report estimated U.S. output last week hit a record high of 12.6 million b/d. Those numbers are viewed as preliminary and could be revised but for now, the EIA is showing an upward trend. That’s part of the estimate of higher non-OPEC output next year.
– One slightly not-bearish number in the report (we won’t call it bullish because it is not that big a deal) is that even after five consecutive months of increases in inventories held in OECD nations, stocks are still slightly less than the five-year average when measured in terms of forward days’ cover (the amount of oil needed to meet all demand if supply suddenly dropped to zero). In September, they were 0.6 days less than the five-year average of 62.2 days.
It was the market reaction Friday after the Iranian incident, combined with the overview presented by the IEA, which supports bearish forecasts. About the only thing the bullish analysts say today in support of higher prices is that it’s a dangerous world and we could have a big supply shock.
The more prevalent view was expressed Friday by Mike McGlone of Bloomberg Business Intelligence. “Crude oil is as vulnerable to a price decline as it was a year ago, but a slump is likely to last longer, in our view,” McGlone wrote Friday. “Support of about $50 a barrel for WTI, which has held since February, is at elevated risk of being breached amid troubling global indicators. We see little to reverse the downtrend that began last October. The swift rejection of the crude price spurt following the attack on Saudi oil assets suggests a revisit of last year’s lows.”
Oil prices for the week were actually higher, lifted by a small reversal Thursday and the kick it got from the Iranian incident Friday. The settlement for WTI Friday was $54.70, up 3.6% for the week, boosted by the Friday increase. For Brent, settlement was at $60.51, up 3.66%. Ultra low sulfur diesel settled at $1.9576, a gain of 3.13% for the week. But that doesn’t change the long-term trend that is clearly pointing downward.
Noble1
For those unfamiliar with technical jargon , I thought it would be helpful to describe what constitutes a downtrend other than my opinion which in itself is in agreement with the CMT’s description .
I chose to quote a CMT’s description at random .
And I quote:
“A downtrend refers to the price action of a security that moves lower in price as it fluctuates over time. While the price may move intermittently higher or lower, downtrends are characterized by lower peaks and lower troughs over time. ” -Gordon Scott
end of quote.
If we take the multi year timeframe that I used in my prior comment which began at the 2008 WTI price peak , you will notice a series of lower lows and lower highs since WTI Crude Oil’s 2008 peak to date with the most recent low in 2016 and the prior high in 2011(lower high than the 2008 high) . This constitutes a “downtrend”
Since then we are in an intermittent time frame within a “larger” trend(multi year) .
If we view what has occurred between the 2016 low up to date we will notice an intermittent high in 2018 on a price chart that still hasn’t been surpassed . Since that intermittent high in 2018 we will also notice that it did not surpass the high that occurred in 2011 either . This indicates that price is still in a downtrend relevant to our multi year time frame that began at the 2008 peak in WTI Crude Oil’s price.
Also notice a descent in price which printed a low in December 2018 that overlapped the intermittent high that occurred in 2017 . This indicates that the prior upward move, a three leg affair, between the 2016 low and the 2018 high is definitely corrective , and in this case considered to be a proregressive correction(an upward move correcting the prior downtrend without changing the trend which in this case is down since 2008) .
Furthermore , Since the December 2018 intermittent low to the October 2018 intermittent high , the April 2019 intermittent high has not surpassed the October 2018 intermittent high . Hence a lower high .
In June 2019 WTI printed a low , then price proceeded to print a short term lower high in July 2019 than the high printed in April 2019 . Then price retraced and printed a slightly lower low in August 2019 than the recent low in June . And then once again reversed and printed a higher high than the short term high in July 2019 but still beneath the high printed in April 2019 .
In technical jargon I’ll label the move described in the paragraph above that occurred between the June 2019 low and the September 2019 high as “an expanded flat proregressive pattern” .
This particular count/label suggests that the proceeding move has a bias towards the downside with an anticipated lower low printing below the August 2019 low as well as beneath the December 2018 low , and potentially beneath the 2016 low . I say potentially beneath the 2016 low because we must keep potential truncations in mind .
In my humble opinion …………
Noble1
Quote:
“We see little to reverse the downtrend that began last October.”
I believe your lookback period concerning what one may label as a “crude oil downtrend” is a little short . From my perspective the “Crude Oil Downtrend” began in 2008 followed by a proregressive correction that peaked in 2011 . Then resumed into its downtrend until another proregressive correction occurred in 2016 which peaked in “October” 2018 . Then resumed into its downtrend that first began in 2008 . The descent in Crude Oil price that resumed in “October” 2018 is a continuation of the 2008 downtrend and not a downtrend in of itself .
Therefore the “Crude Oil Downtrend origin ” which commenced in 2008 doesn’t appear to have terminated until “proven” otherwise , in my humble opinion …………………