Oil prices stabilise but risks remain over glut

By MARK RAO / Pic by TMRpic

The recent stability in oil prices shows the market is gradually rebalancing from excessive glut as demand begins to match supply, according to industry analysts.

However, rising output from US shale producers and countries outside the OPEC umbrella could trigger volatility in the market.

“OPEC’s commitment to trim production, supply and demand dynamics, and US shale oil production are the factors that are propping oil price at US$50 (RM214.63) per barrel,” a research analyst at MIDF Amanah Investment Bank Bhd told The Malaysian Reserve (TMR).

“There is a slow rebalancing of the oil market where demand is starting to catch up to supply, which is in line with OPEC’s pledge and US shale output dynamics playing out. Global economic recovery is also boosting demand,” said the analyst.

“Market rebalancing is a lengthy process. The near-term outlook for oil prices is stable with no negative surprises in the market to bring prices significantly up or down.”

From July 28 to Aug 15, 2017, crude oil prices had been trading from a low of US$50.65 to a high of US$52.70 per barrel. Oil prices were on a roller coaster from May 23 to July 24 this year when prices dropped to a low of US$44.82 from a high of US$54.15 per barrel.

Earlier this year, OPEC and non-OPEC members agreed to extend their pledge to trim production by 1.8 million barrels a day to March next year. In its latest monthly report, the International Energy Agency (IEA) said global inventories fell by 0.5 million barrels per day in the second-quarter of 2017 (2Q17).

However, IEA also estimates that inventories will remain at 60 million barrels above the five-year average, even with a 0.5 million barrels per day decline till March 2018, when the OPEC commitment is set to expire.

JF Apex Securities Bhd senior analyst Lee Cherng Wee said oil stockpile is the indication and measure of how susceptible the market is to volatility.

“We have to look beyond OPEC at output elsewhere as US shale drillers and non-OPEC countries are still ramping up production,” Lee told TMR.

He said IEA is forecasting production from shale regions to top six million barrels a day

this month and the next, while output from key oil regions is set to grow by 117,000 barrels a day to 6.15 million barrels a day in September this year.

“Market rebalancing is dependent on output levels and demand, the latter has been slow due to the global economic slowdown,” Lee said.

He said stability in the market is anticipated to be slow, with oil prices to range between US$45 and US$50 per barrel for the year.