High oil supply outweigh disruptions

Many expected crude oil prices to rally north after the most recent tensions at the Strait of Hormuz as Iran seized a British oil tanker. But broader market dynamics suggest otherwise as the demand growth is not projected to be strong going forward, and the supply side pressures are large enough to subside the impact of this event.

Recall that Opec had agreed to extend the oil production cut deal for another few months, at the beginning of this month, and Russia continued to be part of the deal. The production cut deal has now extended over two years, as Saudi Arabia desperately bids for oil at relatively higher prices. Although, the Saudi expectations have also come down from the previous $88/bbl, the Kingdom is still looking at oil around $72-75/bbl, as a result of the production freeze and cut deal.

But all that, combined with fresh sanctions on Iran and the recent dispute involving Iran and the Britain, have not really dented the international crude oil price. The shipments from Saudi Arabia last week were recorded at an 18-month low, but the market is still far from finding the balance, as demand projections have not gone up simultaneously.

The Goldman Sachs, earlier this month also lowered its forecast for global oil demand citing disappointing global economic activity. The US stockpile rise has slowed down, but the production has continued to stay high. The US shale players are still in the game, pumping enough oil in the market, reducing chances of a substantial bull rally.

The US inventory data is also pointing towards excess supply. The risk premium involving the Iran sanctions and one-off events such as the one at Strait of Hormuz, and occasional disruptions in Libyan supply, have been long factored in. The Opec deal alone has not been enough reason for oil to rally, in absence of strong global demand projection.

And while Iran may well be facing sanctions, it has not stopped it from offloading oil in millions of barrels into storage tanks at Chinese ports. It may not pose an immediate threat to the price patterns, but should Chinese refineries decide to draw oil form what is called “bonded’ storage”, it could well take the oil prices down, as China remains the world’s largest oil buyer. From where things stand, it will have to take a drastic set of events for oil to rebound considerably from the current band in the $60s.