GLOBAL oil markets remained on edge - the entire last week - as interesting, and at times conflicting, developments continued to haunt it. On one hand, the markets needed to decipher the impact of the US missile attack on the Syrian airbase, while on the other, it had to confront the IEA prediction that oil demand growth was set to slow down for the second year in a row. Political issues made markets anxious. It was definitely uneasy over the US missile attack and the growing developments in North Korea. As a US Navy strike group steamed toward the western Pacific Last week, the North Korean state media warned the US of a nuclear attack at any sign of American aggression, displaying its submarine-launched ballistic missiles (SLBM) for the first time on Saturday, ahead of a massive military parade in the capital, Pyongyang. Meanwhile, the US President Donald tweeted, North Korea was "looking for trouble" and the United States would "solve the problem" with or without China's help. This did not help to ease the geopolitical tension either.
But developments pertaining to Syria definitely hovered over the crude scenario. Rising tensions in the oil-rich Middle East, supported by a shutdown at Libya's largest oilfield over the weekend gave a fillip to the markets.
Oil prices rose from around $51.20 to about $52.60 upon news that the US military launched 59 missiles against an airbase in Syria, after the country's government allegedly used chemical weapons Tuesday in a rebel-held area.
However, markets also realized that one attack on Syria didn't alter the ground realities in the real sense. One US air strike on Syria does not make an oil price crisis, Colin Cieszynski, chief market analyst for CMC Markets in Canada, told Global News. "So far it seems that most of the impact was overnight," Cieszynski noted. It would take a "pretty dramatic escalation" of the Syrian conflict for oil prices to register a real, large and lasting increase, Cieszynski emphasized.
Markets were also buoyed by the news from Russia that it would be 100 percent in compliance with the terms of a production deal with OPEC. Russian Energy Minister Alexander Novak said that, at the very least, full compliance to a cut of 250,000 bpd could come by the end of the month, possibly sooner. "We will deliver," he was quoted by Tass as saying.
In the meantime, the OPEC states also cut their output in March by more than pledged, extending a record of higher-than-expected adherence to its first production cut in eight years. Production from the 11 OPEC members with output targets under the deal has averaged 29.757 million bpd in March, average assessments of secondary sources OPEC uses to monitor its output underlined.
Last November, OPEC pledged to reduce its output to 29.804 million bpd. Now the current figures meant that OPEC production has fallen by more than its commitment, amounting to 104 percent adherence to the supply cut regime. "OPEC's compliance has been more than anticipated," an OPEC delegate was quoted as saying by Reuters. "For non-OPEC, it is satisfactory and getting better."
Including Nigeria and Libya, the two members exempt from the deal to cut supply, output by all 13 OPEC members in March fell to 31.939 million bpd, two sources said. That would be down 19,000 bpd from OPEC's published February figure.
Reports last week that Saudi Arabia has told OPEC officials it wanted to continue the cuts to continue for an additional six months, also helped the markets. The Wall Street Journal reported Saudi Arabia telling OPEC officials it supported the idea of extending production cuts enacted in January for another six months when the group meets in May.
In the light of all this, and with the refining maintenance season almost over, and, the summer driving season in North America about to commence, RBC Capital Markets Head of Commodity Strategy Helima Croft is of the opinion that crude oil prices will climb to the low $60s within months - a nearly 20 percent move from current levels. Demand won't fall anytime soon, Croft insists.
Investment Bank Goldman Sachs, in an outlook note, seems to maintain a return to stable long-term oil prices. The bank says its confidence in long-term oil prices has increased due to improvements in technology and lowering costs of shale extraction. Price fluctuations are now likely to be within the realm of 10-20 percent, rather than the quadrupling when new technology methods were being trialed, the note said. Goldman's long-term WTI price of $50 per barrel remains slightly lower than its 5-year estimate of $54 per barrel, however, the bank said it anticipates a positive outlook going forward - one not seen for almost 15 years.
"We believe we are going back to an environment similar to pre-2003, a period characterized by stable long-term oil prices and low oil-dollar correlation," the research note said. "The last time the market had this level of certainty around long-term oil prices was before the rise in long-dated oil prices in 2003, nearly 15 years ago," it said.
And despite projecting a slowdown in demand growth the second year in running, the International Energy Agency (IEA) underlines that the oil market is poised for a recovery in the second half of the year following the supply cuts from major oil producers.
"It can be argued confidently that the market is already very close to balance, and as more data becomes available this will become clearer. We have an interesting second half to come," the agency underlined in its Monthly Oil Report. This was despite the fact that the IEA also pointed out to the stockpiles climbing because of supply increases before the six-month deal between the producers that took effect only on January 1. Oil inventories in the 34-nation Organization for Economic Cooperation and Development increased by 38.5 million barrels in the first quarter to about 3 billion barrels, offsetting the decline in emerging economies, the IEA estimated.
US crude output reportedly also rose by 36,000 barrels a day last week to 9.24 million bpd - the highest since January 2016 - the US Energy Information Administration reported.
And in the meantime, the IEA data also revised down its initial estimates for global oil demand growth. The new forecasts point to a second consecutive year of falling demand for crude, which could establish a more worrying long-term trend for producers. The new data shows weaker-than-expected growth in a number of countries including Russia, India, several Middle Eastern countries, Korea and the US, where demand has stalled in recent months. Consequent to that, the IEA had to cut its 2017 forecast growth to 1.3 million bpd rather than the 1.4 million bpd as forecasted previously.
Despite hiccups, the OPEC efforts toward stabilizing the crude oil markets appear to be succeeding – garnering, in the process, some fruits. And this should also carry a considerable positive impact on the proposed Aramco IPO.
