Oil retreats as IEA casts dark cloud over 2018 market outlook

By Jessica Summers on 11/14/2017

NEW YORK (Bloomberg) -- Crude took a step back now that 2018 isn’t looking so hot anymore.

Futures tumbled as much as 2.8% in New York, the biggest decline in more than a month after touching 2015-highs last week. Hopes that a potential extension of OPEC’s supply curbs will help support the market next year were tempered on Tuesday when the International Energy Agency that recent price gains along with milder-than-normal winter weather are slowing demand growth.

“Global demand growth, with the extension of the production cut, were the two primary factors behind the significant increase we’ve seen, particularly in the last six months,” Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut, said by telephone. The dour growth forecast is “taking a little bit of the bloom off the rose.”

Crude rallied above $57/bbl in New York last week to the highest level since June 2015 as tensions in the Middle East raised concerns about the potential for supply disruptions. Prices also found support from expectations that the Organization of Petroleum Exporting Countries will extend output cuts scheduled to expire in March. That was before the IEA warned that the supply surge from U.S. shale fields will be bigger than anything the oil and natural gas industry has ever seen.

“It’s pretty clear that some of the fears that were priced in over the last month will start to slowly come out,” McGillian said.

By 2025, the growth in American oil production will be on par with that achieved by Saudi Arabia at the height of its expansion, according to the IEA.

“Some of the investors are getting a little bit skittish in terms of the impact on supply, particularly in North America, if we stay in this mid-$50 range,” Michael Loewen, a commodities strategist at Scotiabank in Toronto, said by telephone.

West Texas Intermediate for December delivery fell $1.20 to $55.56/bbl at 11:49 a.m. on the New York Mercantile Exchange. Total volume traded was about 14% above the 100-day average.

Dip in demand

Brent for January settlement dropped $1.29 to $61.87 on the London-based ICE Futures Europe exchange. The global benchmark traded at a premium of $6.12 to January WTI.

The IEA reduced its demand estimate for next year by 200,000 bopd to 98.9 MMbpd, according to projections in its report. Forecasts for demand growth next year also fell by 100,000 bopd to 1.3 MMbpd.

“The market balance in 2018 does not look as tight as some would like, and there is not in fact a new normal” that would buoy prices above $60, said the Paris-based agency.

“If you put two and two together, it shows that we are going to be a little bit oversupplied” in the first quarter, Loewen, said. “Traders in the market are focusing on that right now. We rallied too far, too quick.”

U.S. crude inventories probably slid by 2.5 MMbbl last week, according to the median estimate in a Bloomberg survey before an Energy Information Administration report scheduled to be released on Wednesday. The industry-funded American Petroleum Institute’s report is scheduled to release its stockpiles data on Tuesday.

Oil-market news:

  • OPEC and allied oil producers should extend their production cuts beyond March to help re-balance the market, the United Arab Emirates said.
  • Saudi Arabia is retreating from the U.S. oil market after cutting exports to a 30-year low, allowing Iraq to expand its share.
  • The 10 non-OPEC nations participating in oil production cuts achieved a combined 105% compliance rate in October, compared with a revised 137% in September, according to Bloomberg calculations from preliminary IEA data.
  • Oil producers discouraged by the rising cost of accessing the vast deposits of the Permian basin in Texas are sneaking into a geological back door, through neighboring New Mexico.

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