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Despite some dire forecasts of a massive bull run in crude oil, the market has come off the boil in the last four weeks, thanks to a slight easing of geopolitical tensions, including less-rigorous sanctions on Iran and supply-demand fundamentals asserting themselves.
From around $87 a barrel early October, Brent crude has tumbled by a whopping 15 per cent to less than $72 now, signifying a remarkable correction and confirming that the market actually peaked early last month (as mentioned in the column on October 9, 2018 ).
Sanctions not so stringent
The most interesting and unexpected part of the market in recent days is that the widely believed tough US sanctions on Iran have eventually turned out to be less stringent even as eight countries, including India, have benefited from a sanctions waiver and can continue to import from Iran for the next six months at least.
The waiver means Iran will continue to produce and export oil; and fears of a sharp decline in Iranian supplies are overdone. While Iran’s exports may stabilise around 1.2 million barrels per day (mbpd), there is actually potential for an increase in export given that Japan and South Korea (beneficiaries of the US wavier) may start to import from Iran, asserted an expert. Of course, it is unclear how long the less-hawkish US stand on Iran will continue.
Higher supplies
Meanwhile, major producers continue to pump out larger volumes. Indeed, US shale oil production spurted to 11.3 mbpd in August, which is a new record that makes the country the world’s largest producer. US inventory levels are also seen rising steadily.
Russia is not lagging much behind with 11.2 mbpd. OPEC’s October output reached its highest level since end-2016, despite a drop in supply from Iran, preliminary data showed.
The US Energy Information Administration has predicted that the country’s production could rise to 12 mbpd in the second quarter of 2019. This is seen as a strong positive signal on the supply side, while demand continues to be challenging in terms of consumption growth.
Subdued economic data from the world’s second-largest economy and voracious consumer of crude — China — is a matter of concern on the demand side at a time when supplies are picking up rapidly. The narrative now stands changed. The market is widely seen as adequately supplied, and the sentiment certainly is not one of optimism on the price front.
No wonder, investors represented by hedge funds and money managers have turned bearish and continue to cut their bullish bets on crude futures. The outlook for the first half of 2019 is seen subdued as the supply surge is unlikely to be matched by demand growth.
Relief for India
Given the bearish price situation, it is not unthinkable that major producers, especially OPEC members, may even start to consider curtailing output in the months ahead. However, fears of a loss of market-share may prove to be a deterrent for a cartelised decision to cut output.
Fortuitously, India is going to be a major beneficiary of the less-stringent sanctions or liberal waiver of sanctions on Iran. India can continue to buy as much as three-fourths of the usual quantity purchased from Iran. This should prove to be a welcome relief for the economy, struggling under the twin burden of high energy prices and weak currency.
The author is a policy commentator and commodities market specialist. Views are personal.
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