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Volatility in oil markets set to continue as uncertainty rules day

Global trade wars and geopolitics are adding to the gloom and impacting the price on a daily basis.

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The IEA estimates spare capacity in the Middle East is currently around 1.6mln barrels a day

Volatility and vulnerability, coupled with fear and uncertainty, is never a favourable position, but that’s where the oil market appears to be stuck.

Global trade wars and geopolitics are adding to the gloom and impacting the price on a daily basis.

Having recovered slightly this week from the biggest drop in two years, Brent crude was priced just above US$73 with WTI (West Texas Intermediate) holding above US$70 a barrel on Friday.

Uncertainty about Iran, instability in Libya

Considerable uncertainty about Iran, production decline in Venezuela and instability in Libya are all impacting prices.

Libya announced it was re-opening its ports for oil shipments, and the National Oil Corporation said it would resume exports.

Analysts estimate supply of up to 850,000 barrels could be available, but giving the recurring instability in Libya, the market is not expecting major shipments in the near-term.

The International Energy Agency and OPEC issued their monthly oil reports this week with the IEA focusing on the lack of spare capacity in the world.

While it welcomed the actions of OPEC and friends in returning oil to the market, it noted that this will dwindle the spare capacity needed to keep a sense of security and confidence in global oil markets.

The IEA fears that while the collective OPEC action might ease prices, supplying more oil to the market will exhaust the world’s spare capacity cushion.

The report said that given so many supply disruptions in oil producing countries, this is putting pressure on global oil supply.

The report said, “this vulnerability currently underpins oil prices and seems likely to continue doing so”.

Spare capacity

The IEA estimates spare capacity in the Middle East is currently around 1.6mln barrels a day, with OPEC crude production at 31.87mln barrels a day.

In OPEC’s monthly oil market report, the organisation sees world oil demand growth for the full year unchanged since its last report at 1.65 million barrels a day with total demand at 98.85 million barrels a day.

Looking ahead to 2019, the report said, “the initial projection indicates a global increase of around 1.45 million barrels a day, with annual average global consumption anticipated to surpass the 100 million barrels a day threshold”.

Most of this demand will come from India and China. OPEC sees solid growth this year, but looks to 2019 with caution, saying that trade tensions could weigh on business and consumer sentiment.

"This may then start to negatively impact investment, capital flows and consumer spending, with a subsequent negative effect on the global oil market."

Global oil demand remains strong, but Capital Economics noted a falloff in commodity imports to China last month.

“High prices could have deterred oil imports,” but this should be temporary.

“Oil imports fell for the second consecutive month as many refineries remained in maintenance, perhaps choosing to stay offline given high prevailing crude prices and lower profit margins.” 

Chinese oil imports fall

The report noted that Chinese oil imports also fell in year-on-year terms.

The US secretary of State, Mike Pompeo took to twitter this week to call on European allies to get tough on Iran.

The US has made its intentions very clear in recent months that it wants to stop Iranian oil exports and heap economic pressure on the country.

“We ask our allies and partners to join our economic pressure against Iran’s regime,” Pompeo tweeted, adding “Iran will start trouble wherever it can.”

President Trump turned his attention to Germany this week, claiming it was over reliant on Russia for its gas supply.

The volatility in the market will continue as uncertainty rules the day. OPEC and friends may have a quiet few months, but oil ministers continue to monitor the markets and have always said they will be ready to act to maintain balance and keep producers and consumers adequately supplied. 

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