Where are the oil prices going to move next?

The market’s reaction at present can at best be seen as lukewarm. Even Saudi minister of energy Khalid Al Falih’s statement about a possible a Saudi export cut to the USA, or OPEC’s secretary general Mohammad Barkindo’s call for higher compliance have not yet changed the still bearish views in the market at all. Current feelings in the market are largely linked to higher production volumes in Libya and Nigeria, combined with the threats by smaller OPEC countries, such as Ecuador, to leave the deal.

Suhail Mohammed Al Mazrouei, UAE’s minister of energy, stated that there are several challenges in the market at present. The main challenge for the current OPEC-Non-OPEC production cut is that several countries need additional revenues to fuel economic recovery/diversification, such as Iraq, Iran or Libya, while at the same time, some production is returning to the market.

The U.S. shale oil sector is still growing, even if production growth is flattening out and production per well has fallen. Additional wells drilled are not completed, but are ready to produce when oil prices rise.

Hedge funds are still holding large bearish bets against oil and OPEC, yet out in the real world traders and refiners buying and selling actual barrels say it’s starting to look somewhat more bullish.

"The market is looking a bit better," Ian Taylor, chief executive officer of Vitol Group, the world’s largest oil trader, said in an interview.

While financial investors largely look at just those two big crude contracts, physical traders have broader view because they regularly deal in dozens of varieties from Venezuela’s Tia Juana Light to Vietnam’s Bunga Kekwa.

Price differentials for some important varieties of crude, including Russia’s top export Urals, are at the strongest levels in three years, according to data compiled by Bloomberg. That would be encouraging for Saudi Arabia and its allies, if the hedge funds were paying attention.

The emerging tightness in the physical market helped Brent to move briefly above $50 a barrel last week, but prices were back below $49 again on Monday. Even as Saudi Arabia promised deep cuts in shipments at a meeting of producers in St.
Petersburg, Russia on Monday, signs of growing production from Libya and Nigeria -- exempt from the output curbs -- kept a lid on prices.

Seasonal Factors

Refiners process more oil during the northern hemisphere summer as holidaymakers hit the road, consuming more gasoline and diesel.

Global refineries’ oil intake will peak at 81.4 million barrels a day in August, up from 80.1 million barrels a day in May, before the start of the driving season, according to the International Energy Agency.

After a weak start of the year, global oil demand growth is strengthening. The IEA forecasts annual consumption to climb 1.6 million barrels a day in the third quarter from a year earlier.

Ural Differential

In Europe, Urals crude was 65 cents a barrel cheaper than Brent this month, the narrowest discount in almost three years, according to data compiled by Bloomberg. In April, the discount was about $2.

In the Americas, Colombian crude Vasconia is quoted at $3 a barrel under WTI, the narrowest discount in four years, and half the $6 differential in January. Oriente crude, pumped by OPEC member Ecuador, is trading at a discount of $5 a barrel to WTI, the narrowest since 2013.

US Oil rigs count

The latest data from July 21 shows that oil rigs have reached a total count of 764. The trend to increase seems to start weakening, with the number of platforms in July almost unchanged. At the beginning of the month, the total number of platforms was 763. The increasing number of platforms in recent months has been heavily negative over oil prices, and now the impact of this factor is beginning to weaken.

Source: Bloomberg Pro Terminal

Jr Trader Ivan Ivanov

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