Geopolitics takes back seat in oversupplied oil markets
THE MIDDLE EAST witnessed two major geopolitical events in June -- a diplomatic crisis that left Qatar isolated and a regime change in Saudi Arabia. The fact that oil prices hardly reacted to either underscores the persistent supply glut facing the market.
On June 5, Saudi Arabia, the UAE, Bahrain, and Egypt abruptly severed diplomatic and transport ties with Qatar over longstanding allegations that the maverick emirate had been financing Islamist terrorist groups that threatened the security of its Arab neighbors.
They isolated Qatar through closure of the state’s only land border -- with Saudi Arabia -- by banning Qatari planes from neighboring airspace, and Qatari ships from its neighbors’ territorial waters and ports.
In the past, such potentially destabilizing events in the Middle East sent jitters through the market and drove prices sharply higher. But barring a knee-jerk reaction when the market assessed the impact the diplomatic crisis could have on the OPEC/non-OPEC production cut agreement (Qatar is a small oil producer and is party to the agreement), the focus went back to the over-supplied state of the market.
Crude oil prices hit seven-month lows last month with ICE Brent touching $44.82/barrel and NYMEX WTI $42.53/barrel as rising production out of the US, Libya and Nigeria sent jitters through the market.
But what the Qatar diplomatic crisis did do is throw Asian oil buyers’ logistics in complete disarray as confusion emerged on whether buyers lifting Qatari crude oil will be able to stop at ports in the UAE to co-load cargoes or bunker for fuel in the regional bunkering hub of Fujairah.
The typical cargo size in the Middle East is 500,000 barrels, which leads to Asian oil buyers co-loading four cargoes from various ports to fill a VLCC (Very Large Crude Carrier) before it heads to Asia.
Though the UAE after a couple of weeks of confusion cleared the air, saying that vessels going to or coming from Qatar can stop in the UAE ports, buyers have become cautious and are even considering shunning Qatari crude and looking for alternatives from elsewhere.
Meanwhile, Fujairah’s loss was Singapore’s gain. Singapore, the world’s largest bunkering port, witnessed a jump in bunker fuel sales as shipowners heading to the Middle East preferred to play it safe and tank up in the city-state.
Against the backdrop of the diplomatic crisis, Saudi Arabia’s King Salman appointed his son Mohammed bin Salman as the kingdom’s new crown prince, removing Prince Mohammed bin Naif al-Saud of his posts of crown prince, deputy premier and interior minister, and settling what had been seen as a power struggle between the two rival princes.
The 31-year-old Mohammed bin Salman has spearheaded Saudi Arabia’s National Transformation Plan, which includes the sale of up to 5% of state-owned oil company Saudi Aramco through an IPO.
As well as economic planning, Mohammed bin Salman was already firmly in control of Saudi military strategy and foreign policy. Over the last two years, the kingdom has embarked on a protracted war in Yemen, and this month cut diplomatic, transport and logistic ties with Qatar. Its stance towards its regional rival Iran has also hardened.
Along with Aramco’s IPO, one of Mohammed bin Salman’s policies has been attempting to re-exert OPEC’s ability to manage the oil market. His elevated status could mean that Saudi Arabia will continue to aggressively pursue the output cut plan.
Despite these seemingly bullish factors, oil prices have only moved lower and not surprisingly, the reason lies in the data.
Paris-based International Energy Agency in its latest report estimated that global oil supply had risen by 1.25 million b/d in May, led by non-OPEC countries, amounting to the largest increase since February 2016.
The IEA went on to say that commercial oil stocks in OECD countries had risen by 19 million barrels in April, to 3.05 billion barrels, putting them 292 million barrels above the five-year average, and higher than at the time of OPEC’s production cut agreement last year.
On the demand side, the IEA kept in place its estimate of this year’s global oil demand growth, of 1.3 million barrels per day (b/d), but noted that growth in the first quarter had been just 900,000 b/d on the year -- a two-and-a-half year low.
Though US crude stocks have declined -- the surplus to the five-year average which stood at 147.60 million barrels in February this year has come off to 107.4 million barrels recently, US crude output is showing no signs of slowing down. Output is up 580,000 b/d since the end of 2016 to around 9.3 million b/d -- the highest since August 2015.
It is this data and data on rising Libyan and Nigerian oil production that the OPEC and non-OPEC monitoring committee is going to pour over when it meets in late July to chart the future course of action.
Mriganka Jaipuriyar is the Associate Editorial Director for Asia & Middle East Energy News & Analysis of S&P Global Platts.