May 21, 2018

Oil Price Rises Pose a Threat to Global Growth Next Year

17 May 2018, 06:00 | Melvin Schneider

OPEC compliance reaches record 172%

Oil hits high

Crude traders who peddle cargoes to refineries worldwide say speculators are on shaky ground as they drive futures markets above $70 a barrel, their highest levels for three-and-a-half years, on concerns about tighter supply from Venezuela and the potential impact of U.S. sanctions on supply from Iran.

WTI's June contract traded at $72.06/bbl on the New York Mercantile Exchange, up $0.57, after climbing $0.18 on Wednesday.

The International Energy Agency (IEA) has warned that global oil supplies could be severely impacted by the USA decision to pull out of the Iran nuclear deal.

The downward trend was supported by data released late Tuesday by the American Petroleum Institute showing US crude oil inventories increased last week by 4.8 million barrels. About $10 of the price increase in crude oil has come in the last two months, when the oil markets began pricing in the premium that would likely accrue after the United States' withdrawal from the Iran nuclear treaty and the resulting sanctions on doing business with Iran.

The International Energy Agency said on Wednesday that oil inventories worldwide had tightened after a year-and-a-half of supply cuts by major oil producers, along with Venezuela's ongoing economic crisis that has sapped its production. Much will depend on how other major oil consumers respond to Washington's action against Tehran, which will take effect in November.

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OPEC revised its oil demand growth estimate by 25,000 barrels per day (bpd) from the April 2018 report to 1.65 million bpd.

"U.S. shale can not solve the current oil supply problems", it said, arguing that US oil would not be sufficient to offset production losses from Iran, Venezuela and Angola.

Demand for oil drastically increased prices and has resulted in oil prices increasing by more than 70 per cent over the past year.

In fact, the alleged "disconnect" is readily explained based on recent developments in the market, notably the prospect for interruption/reduction in Iranian supplies due to the reimposition of sanctions by the US. A stronger greenback makes it more expensive to buy dollar-denominated commodities like oil.

The U.S.' answer to high prices is to drill, baby, drill. But even on a macro level, the rise in oil prices over the past year seems to have more than offset the impact of sanctions. "It would be extraordinary if such a large jump did not affect demand growth, especially as end-user subsidies have been reduced or cut in several emerging economies in recent years". China's crude oil imports in the first quarter increased by 7 percent on the year to around 9.09 million bpd-a rise of nearly 595,000 bpd on average compared to Q1 2017, according to Reuters calculations. "Oil stocks fell across the board and in some cases more than expected, whilst rising exports point to healthy demand for United States crude", Commerzbank analyst Carsten Fritsch said. Now, they are already 15 percent lower than year-ago levels, thanks in large part to OPEC's cuts specifically targeting the US market.

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