Speculation that nations are stockpiling oil at the fastest rate in 14 years is fanning expectations for Brent crude to drop below $100 a barrel.
OPEC pumped 2.1 million barrels a day more than projected demand in April through June, the biggest overproduction for any quarter since 1998, the International Energy Agency estimates. The increase has been overshadowed by focus on U.S.-led sanctions against Iran’s oil exports, Citigroup Inc. said. Brent will fall to $93 by September and $83 by year-end, according to the Centre for Global Energy Studies.
Shuttered oil output in nations outside the Organization of Petroleum Exporting Countries is poised to resume after South Sudan this week agreed on a transit fee with its northern neighbor and Yemen fixed its main crude pipeline. Those two countries will add about 500,000 barrels a day to compete with OPEC, which is pumping the most since 2008. While the world faces the slowest pace of growth in fuel demand since the 2009 recession, crude rallied above $110 this week amid heightened political tensions in Syria.
“There is an overhang of producible oil in the world,” Ed Morse, Citigroup’s global head of commodities research, said in a July 31 phone interview from Houston. “We will probably see more Iranian oil lifted or leaked while OPEC continues to produce more than is demanded. If China remains sluggish, oil could drop to the low $90s and even fall into the $80s.”
Going into Storage
OPEC produced 31.9 million barrels in the second quarter compared with projected demand for the group’s crude of 29.8 million, IEA data showed. OPEC hasn’t overproduced as much since 1998, when supply exceeded demand by 3.4 million barrels a day. Most of the excess oil is probably going into developing-nation storage sites where data is scarce, as only 15 percent is accounted for in the 28 Organization for Economic Cooperation and Development countries the Paris-based energy agency advises.
The flood of supply comes as the euro area struggles to contain a debt crisis now in its third year. Economic growth has decelerated for six quarters in China while the U.S., the world’s biggest oil consumer, has a jobless rate that hasn’t dropped below 8 percent for more than three years. U.S. oil consumption fell 1.1 percent last week, the first drop in four weeks, a report from the Energy Department showed yesterday.
OPEC lowered demand estimates for its crude this year and next. The group’s 12 members will need to supply 29.9 million barrels a day this year, 100,000 barrels a day less than in 2011, and 29.5 million barrels of crude a day in 2013, OPEC’s Vienna-based secretariat said today in its monthly report.
The global economy is forecast to climb 3.5 percent this year, compared with 3.9 percent in 2011 and 5.3 percent in 2010, International Monetary Fund data show. It shrank 0.6 percent in 2009, when oil demand dropped the most since the IEA started records in 1986.
Brent, a benchmark grade for more than half the world’s oil, fell below $90 a barrel in late June, then rebounded as a European Union embargo on Iran’s crude came into full effect in July. Prices are 0.3 percent higher today at $112.50 after settling yesterday at $112.14 on the ICE Futures Europe exchange, up 26 percent from the year’s low on June 21.
Citigroup forecasts oil averaging $105 a barrel in the coming three months, and then dropping to $100, “with higher downside price risk than upside potential,” Morse said. Refinery outages in the U.S., the return of halted output in non-OPEC nations, higher Iraqi exports and Saudi Arabian production of at least 9.5 million barrels a day raises the chance of crude falling below the three-digit mark, he said.
Most analysts forecast Brent holding above $100 with the median estimate for the third quarter at $106 and $108 in the fourth, according to a Bloomberg survey of 36 researchers.
‘Realism Will Prevail’
“Realism will prevail and prices will sink back,” said Leo Drollas, chief economist at the London-based CGES, which correctly forecast that Saudi Arabia would raise output in June to push prices below $100 for the first time this year. “Where is all the oil going to go? Iran has ways of circumventing sanctions, Iraq and Libya are producing more, and oil demand isn’t strong with the current status of the world economy.”
About half of the 1 million barrels a day of oil that has been shuttered in non-OPEC nations such as Yemen, Sudan, South Sudan, Syria and Norway will return, adding to the glut. South Sudan said Aug. 6 it will start its 375,000 barrel-a-day output by next month once it reaches a deal with Sudan on transit fees and border security. Yemen resumed flows from its main pipeline in mid-July, after at least 18 sabotage attacks since March 2011 cut off 120,000 barrels a day of crude that the link carries.
South Korea’s import of Iranian crude may resume as early as next month, Yonhap News said yesterday, citing unidentified government officials. Iran has offered to supply oil on its own tankers, a South Korean government official said June 29.
Producers may struggle to find an outlet for the extra oil as China, the world’s second-biggest crude buyer, cuts imports. Net purchases from overseas slid 12 percent in June from May, the biggest drop since October 2010, data from the customs service showed. Imports fell as commercial and emergency-reserve sites filled up, Gong Jinshuang, a senior engineer at China National Petroleum Corp, said July 17.
The country, which is building 207 million barrels of storage as part of a strategic-reserve plan, hoarded fuel at the fastest pace since the 2008 Beijing Olympics in the first five months of the year.
OPEC must reduce output to a range of 30 million to 30.5 million barrels a day to “prevent further price weakness,” Energy Security Analysis Inc., based in Wakefield, Massachusetts, said in an Aug. 2 report. Saudi Arabia, the world’s biggest crude exporter, raised production earlier this year to the highest in at least three decades to damp prices that had rallied to a 2012 high of $128.40 on March 1.
Economic stimulus plans may encourage demand, according to Commerzbank AG. Plans by the European Central Bank to buy bonds of euro area countries struggling with debt and the possibility of a third round of so-called quantitative easing by the U.S. Federal Reserve is boosting confidence that policy makers are keen to promote growth, Eugen Weinberg, Commerzbank’s head of commodities research said in an Aug. 6 interview from Frankfurt.
OPEC left its collective output limit at 30 million barrels a day at its June meeting, a level its 12 members exceeded by 1.8 million barrels in June, according to the IEA, as Saudi Arabia and its allies sought to make up for lost Iranian barrels ahead of sanctions. There’s enough oil to make up for further losses of Iranian production, which slumped to a 22-year low of 3.3 million in June, cutting OPEC supply by 100,000 barrels, the IEA said.
“The underlying profile for demand requires OPEC to produce less than 31 million barrels a day in the second half of the year,” David Fyfe, head of the IEA’s oil industry and markets division, said in a July 25 telephone interview from Paris. “OPEC is producing about 1 million barrels more than that, so it’s arguable whether they will have to do more than they already have done, even if we lose more Iranian oil.”