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With British voters surprisingly voting to leave the EU, oil is likely to remain very volatile in the coming weeks. Notably, Britain’s exit means there’ll be a period of uncertainty over Europe’s future, casting a shadow over the market. Any reversal in the growth of trade and mobility is generally negative for the commodities, except gold. Following the Brexit vote, money will likely continue to flow into the U.S. dollar (safe haven) in the near term, which will continue to weight on oil prices. That said, when the Brexit hangover subsides, traders will no doubt again focus on the fundamentals of the oil market as the global crude surplus fades. They’ll also have to weigh any lasting impact from the U.K.’s decision on the world economy and oil demand. Despite Britain voting to leave the EU, oil market fundamentals have not changed, and the global oil market is still set to balance sometime in H2/16. If anything, this period of volatility following the Brexit vote should provide the oil bulls with some great buying opportunities......
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In its most recent report, the IEA noted that rising demand and supply disruptions are bringing the oil market back into balance. Specifically, the IEA has revised its H1/16 global oil surplus to 800,000 b/d, 40% less than its previous estimate. Regarding its 2017 outlook, the IEA expects global oil demand to increase by 1.3 million barrels a day to reach 97.4 million barrels a day (same rate of increase as in 2016). Further, non-OPEC production is expected to grow at a modest 200,000 barrels a day, with gains limited to Canada and Brazil. Average output for US shale is expected to be 190,000 barrels a day lower next year, after falling 500,000 a day in 2016. In total, global inventories are expected to decline by 100,000 barrels a day through 2017. Overall, the IEA's predictions point to a market re-balancing in H2/16, as a drop in inventories in Q3/16 counters another increase in Q4/16. That said, the rebalancing of the market could be delayed if halted supplies in Canada, Nigeria and Libya are able to restart. The IEA's relatively bullish outlook suggests that there is finally a light at the end of the tunnel and oil prices will likely continue their upward trajectory.
As expected, OPEC members failed to reach an agreement on a new production ceiling at its most recent meeting in Vienna. Despite an agreement, OPEC members did show signs of increased unity. Specifically, Saudi Arabia promised at the meeting not to flood the market with extra oil, suggesting a softening of its previous stance where it rigorously pumped to defend its market share. Saudi energy minister Khalid al-Falih noted that "We will be very gentle in our approach and make sure we don't shock the market in any way." Further, Iranian oil minister Bijan Zanganeh noted that he saw no signs at the Vienna meeting that other member countries wanted to boost output steeply. In a final sign of increased cooperation, OPEC members did reach consensus on appointing Nigeria’s candidate as new secretary-general. His appointment demonstrates that OPEC has at least overcome squabbles that scuppered consensus on the top job at previous summits. Overall, increased cooperation between OPEC members, combined with steadily declining non-OPEC production (evidenced by surprise declines in U.S. crude inventories more recently) are both positive signs for the price of oil going forward.
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Jason SawatzkyA Canadian Energy expert Archives
October 2020
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