Published: Thu, May 17, 2018
Money | By Armando Alvarado

IEA cautions consumption decline as oil price advances to $80

IEA cautions consumption decline as oil price advances to $80

Drillers added 10 oil rigs in the week to May 11, bringing the total count to 844 - the highest since March 2015.

Currently, OPEC and non-OPEC producers have restricted themselves to 32.5 million bpd.

In addition, crude exports from the United States have the capacity to increase as higher prices provide incentives to Shale producers to drill more wells. Brent, the benchmark on which two-thirds of the world's oil is priced, has surpassed $78 a barrel, the highest since November 2014.

OPEC on Monday reported it's cutting production by more than is required.

Members of OPEC, including Saudi Arabia, Kuwait and the United Arab Emirates, said they have enough capacity to fill in any supply gap if renewed sanctions curtail Iran's exports.

Analysts project that oil exports from Iran could be reduced by about 0.5 million barrels a day as South Korea and Japan trim their imports, said analysts for J.P. Morgan in a recent report.

As such, traders should keep an eye out for exactly what European and Asian allies do following the imposition of sanctions from the U.S., as this will greatly impact quite how much oil is taken off the market.

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The difference between the two benchmarks briefly widened to more than $8 a barrel, the widest gap since April 2015, reflecting surging US crude supplies and a greater geopolitical risk to Brent-based crudes.

"That absolute plunge in Venezuelan production ... just highlights how tenuous the market is in terms of the supply-and-demand balance", said John Kilduff, a partner at Again Capital LLC.

Saudi Arabia has acknowledged the need to work with producers and consumers to mitigate possible supply shortfalls, which could be offset by higher expected growth in USA oil output of 120,000 bpd this year.

Despite these downward forces, the market retains support from OPEC and other producers' production cuts and US sanctions on Iran. According to the experts' projections, daily oil consumption across the globe will increase by 1.5 million barrels in 2018 and 1.4 million barrels next year.

Spot crude oil cargo prices are at their steepest discounts to futures prices in years as sellers are struggling to find buyers for West African, Russian and Kazakh cargoes, while pipeline bottlenecks trap supply in west Texas and Canada.

OPEC thinks non-OPEC oil supply will grow at 1.72 million bpd year-on-year in 2018. Even though the energy minister of Saudi Arabia promises "oil market stability for the benefit of producers and consumers", he has been coy about providing specifics.

The Organisation of the Petroleum Exporting Countries (Opec), has not restricted the number of barrels available but has not made up for the loss of barrels from Iran. Speculators could liquidate en masse and demand growth may underperform, while the amount of Iranian oil taken offline could end up at the lower end of expectations. "Coupled with no signs of new supply coming on, demand remaining strong as well as the geopolitical turmoil in Iran and you have the conditions for this push up towards $80" a barrel.

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