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Crude realities $40 barrel threat looms

Crude realities: $40 barrel threat looms

TORONTO: Despite some recent strengthening, oil markets could be in for a long, hard and volatile summer for oil markets.

Now some are clamouring that $40 era may not have gone away for good. It could still stage a comeback. As markets are vying to strike a demand-supply balance somewhere, conflicting forces seem impacting, raising fears that the glut has not really diminished, but merely moved downstream.

The Paris-based IEA, the OECD energy watchdog, has just warned that crude stockpiles that kept rising over the last many months, have pushed the floating storage to the highest level in seven years. “(Stocks) are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices,” the Paris-based group said in its latest report. And this is threatening the rebalancing process in the markets.

There are warning signs that global oil demand is ebbing while oil stocks remain at “elevated levels,” threatening a rebalancing act in oil markets, the International Energy Agency cautioned last Wednesday.

The IEA report said that while its data this month suggest that “little has changed with the market, showing an extraordinary transformation from a major surplus in the first quarter of 2016 to near-balance in the second quarter of 2016” there were signs of potential instability.

“In mid-summer 2016, although market balance is upon us, the existence of very high oil stocks is a threat to the recent stability of oil prices: in the first quarter of 2016 refinery runs growth (referring to the amount of oil a refinery can produce) was 60 per cent higher than refined product demand growth,” it said.

With global refinery runs expected to fall by 800,000 barrels per day (bpd) in the second quarter of 2016 before surging by 2.4 million bpd in the third quarter, the IEA said that “we may well see crude oil stocks fall back but there is a risk that, unless demand turns out to be stronger than we currently anticipate, products stocks could rise still further and threaten the whole price structure.”

Neil Atkinson, head of the Oil Industry and Markets Division at the IEA, while summarising the report told CNBC. “The main point of the report is that although the oil market is coming close to balance in the second half of 2016, it is doing so against a background of very, very high level of oil stocks which have been building up remorselessly over the last three years or so. These high stocks are a major dampener on oil prices,” he said, “so I think we’re rather range-bound for the time being.”

Some are beginning to underline that the recovery in oil prices risks being derailed as the near two-year-old glut in crude is transformed into a huge surplus of gasoline and diesel that is swamping the market.

The situation is getting evident in the world’s largest market – the United States too. Last week crude inventories fell, less than analysts’ expectations. Analysts pointed fingers at the existing stocks for the development. Crude inventories fell 2.5m barrels in the week to July 8, less than analysts’ expectations for a decrease of 3m barrels, the US Department of Energy reported.

“A surprising build in gasoline in the peak of US driving season and a very large build in heating oil will set the tone for lower prices as we go forward,” Tariq Zahir, a trader in crude oil spreads at Tyche Capital Advisors in New York, was quoted as saying.

“The products markets will continue to put weakness in the energy complex.”

Producers (mainly in the US and Canada) who shut down production as prices troughed into the 30s, are looking at the prices keenly. Already the rig numbers in the US are staging a recovery – slowly but surely.

The changing horizon on the global oil demand may also get into play, making the balancing process still slower. The IEA is now forecasting a “modest deceleration” in global oil demand growth that was foreseen for 2017, easing to 1.3m bpd taking average deliveries up to 97.4m bpd.

Despite some recent strengthening, oil markets continue to tread a hazy route. Keeping aside the rattling in the wake of Istanbul events, uncertainty continues to rule the energy markets.

Courtesy : Dawn News



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