This historical crude oil development to drive demand, prices, to the roof

Monday May 28 saw another price tumble for oil prices, after crashing down last Friday.

The correction is mainly due to Saudi and Russia declaring their intent to increase oil supplies by some 1 million bpd as compensation to Venezuela’s output dropping to 1.5 million bpd in April, a fall of 260,000 b/d from January,  and upcoming sanctions on Iran, OPEC’s third biggest producer.

The sustained fall in Venezuelan output helped OPEC and non-OPEC members to significantly exceed the intended total production cuts over the past eight months.

“Brent crude futures were at $75 per barrel, down $1.35, or 1.8% percent, , while US West Texas Intermediate (WTI) crude futures were at $66.22 a barrel, down $1.66, or 2.5%, both from their last close,” said Reuters today.

“Brent and WTI have fallen by 6.4% and 9.1% respectively from peaks touched earlier in May (at $80 for Brent and $75 for WTI).”

However, 2 major developments, one historical, will likely push prices higher.

Surplus reaching an end

OPEC started withholding supplies in 2017, to the tune of 1.2 million barrels per day, to tighten the market and prop up prices, which in 2016 fell to their lowest in more than a decade at less than $30 per barrel.

This was in contrast to U.S. crude production surging by more than 27% in the last two years, to 10.73 million barrels per day (bpd), bringing its output ever closer to Russia’s 11 million bpd, according to Reuters.

Now, Bloomberg revealed that OPEC and allied oil producers including Russia concluded that the crude market re-balanced in April, when their output cuts achieved a key goal of eliminating the global surplus.

“The excess in oil inventories, which has weighed on prices for three years, plunged in April to less than the five-year average for stockpiles in developed nations,” reported Bloomberg quoting people with knowledge of the data assessed at the meeting of the Joint Technical Committee of OPEC and other producers last week in Jeddah, Saudi Arabia.

The International Energy Agency (IEA) said on May 16 that OPEC and its allies have finally succeeded in clearing a glut, with inventories falling below their five-year average for the first time since 2014.

OPEC and its partners meet in Vienna late June 2018 to discuss future strategy.

“The Joint Technical Committee determined that stockpiles held by developed nations dropped to about 20 million barrels below their five-year average, for a total decrease of about 360 million barrels since the start of 2017,” three of the people told Bloomberg.

The Sulfur game changer

“An upcoming regulation that analysts have called “the biggest change in oil market history” and the “the most disruptive change in the refining industry” is lurking just around the corner, and experts say that it will drive oil prices higher as it will fundamentally shift the demand pattern for fuels,” said Oilprice.com

“The regulation concerns significantly limiting the sulfur content in the fuel that ships use, in a bid to curb emissions from the shipping industry.”

The industry sire added that the International Maritime Organization (IMO) has set January 1, 2020 when only low-sulfur fuel oil will be allowed to be used for ships.

Here’s the problem: “Middle Eastern crude oil producers could be one the biggest losers from the new regulation, because they pump high-sulfur crude, Amrita Sen, chief oil analyst at Energy Aspects,” told CNBC.

The global sulfur limit on fuel oil will be set at 0.5% m/m (mass/mass) in 2020 down from the 3.5% m/m current global limits.

“The regulation will send demand for middle distillates such as diesel and marine gasoil soaring, and refiners will have to shift some of the products they will be processing from crude oil,” said Oilprice.com quoting analysts.

“The stricter regulation on the fuels used by the shipping industry will result in booming demand for middle distillates that would boost crude oil demand by additional 1.5 million bpd, potentially sending oil prices to as high as $90 a barrel in 2020,” Morgan Stanley said last week.

Demand for diesel and ultra-low sulfur fuel is expected to jump by 2 million bpd to 3 million bpd, Energy Aspects analysts noted.

(This article was first published on AMEinfo, sister publication of TRENDS)