Mideast Opec producers fret oil price rally may burn out
SINGAPORE: Middle East Opec producers are concerned weak demand and excess supply in the first quarter of 2018 may undermine an oil price rally that has pushed Brent crude about 30% higher since June, Opec and industry sources said.
Supply cuts since Jan 1 by the Organisation of the Petroleum Exporting Countries, Russia and other producers helped lift prices, while Hurricane Harvey added to gains when it knocked out nearly a quarter of US refining capacity.
Benchmark Brent rose above US$59 a barrel this week, its highest level in more than two years and nearing the US$60 mark. Gulf oil sources have said Opec’s largest producer Saudi Arabia would like to achieve that level this year. Brent is now trading around US$58.
“I don’t think it is sustainable,” said one senior Gulf oil industry source, citing possible excess supply from US shale oil producers in the first few months of 2018 on the back of higher prices now.
Opec and others have cut production by about 1.8 million barrels per day (bpd), but US shale producers have been filling the gap, with their output set to rise for a 10th month in a row in October.
Climbing global demand for crude have also helped prop up prices, as have tensions Opec member Iraq, where authorities in its semi-autonomous Kurdish region held an independence referendum despite opposition from Baghdad and Western powers.
A second industry source from a main Middle East producer said the price rally ”might be short lived.”
“I think a range of US$50-US$55 a barrel is good, you don’t want to see prices rising to US$60 or higher because then it will bring in more shale,” the source said.
One Opec source said: ”The thing that worries me most is how demand will react in fourth quarter and early first quarter of next year. It may go down significantly.”
Opec-led supply cuts are due to run to the end of March, but Opec and industry sources familiar with the matter said they expected cuts to be extended beyond that deadline.
“The cuts will be extended, but it is a matter of when to announce it. Will it be in November? Or better to wait a bit longer and announce it in January?” said a third industry source from a Middle East producer.
“The market is tightening, it moved to backwardation now, so you can see the effect of the cuts,” the source said.
Backwardation is a market condition in which it is more attractive to sell oil immediately than store it, indicating tighter supplies. – Reuters