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NBK Capital: Oil prices retreat in July as supply concerns ease

August 26, 2014

Oil prices retreated in July from the nine month highs reached in June according to new analysis from NBK Capital.

The price of Kuwait Export Crude (KEC) fell by almost $5, from $108.2 per barrel (bbl) at the start of the month to $103.4/bbl by the end of the month. The international benchmark crude, Brent, declined by $6.9/bbl from $110/bbl to $103.2/bbl, while West Texas Intermediate (WTI) dropped by $6.6/bbl from $104.5/bbl to below $98/bbl—its lowest level in six months. Underpinning these downward movements was an easing of geopolitical anxieties over Iraq and Libya especially.

In Iraq, despite the territorial gains made by ISIS in the north and northwest of the country, the insurgent advance southwards was eventually held in check by Kurdish Peshmerga forces around Kirkuk and by the Iraqi military based in the vicinity of Baghdad. The bulk of Iraq's key oil infrastructure, production and export channels is situated in the south, away from conflict areas. In Libya, meanwhile, news that exports were finally resuming in spite of the heavy fighting that was taking place between militias and government units in Tripoli and Benghazi provided some measure of relief for the oil markets.

In the US, the fall in WTI is also reflective of a buildup of crude oil stocks at Cushing, Oklahoma, the main storage hub and pricing point for WTI. This came about as a result of a series of outages at key refineries which have cut refinery runs ahead of the main refinery maintenance period that begins in late August and continues through to October.

Crude oil futures prices similarly declined during the month, influenced by a combination of slower demand, weak refining margins and an easing of concerns about Iraqi and Libyan oil supplies. ICE Brent futures for December 2014 delivery retreated by $4.1/bbl during the month, closing at $106.9. For the first time in three years, the price of a Brent futures contract moved higher than the spot price, a price structure known as contango. Brent futures moved from backwardation to contango on 27 June, reflecting an excess supply of crude in the North Sea and Atlantic basin caused by a drop in demand from European refineries. In contrast, the WTI futures curve, having spent six years in contango, switched into backwardation.

World oil demand

The forecast for world oil demand growth in 2014 has been revised downwards by the International Energy Agency (IEA) by 90,000 b/d to 92.7 mb/d. Weaker-than-expected crude deliveries in Germany and Italy in 2Q14 as well as in China, where heavy rainfall adversely affected industrial use, were the main reasons cited by the IEA for their outlook revision. We now have 2Q14 GDP data, showing no real growth in the EU, and negative numbers for Germany and Italy. On the whole, a more modest pace of global economic growth than previously anticipated is now being envisaged for 2014; the International Monetary Fund (IMF) has hinted that its forecast for world GDP growth of 3.6 per cent in 2014 will likely be revised (again) downwards slightly.

Compared to last year, global demand is therefore forecast to expand in 2014 by 1.2 mb/d (or 1.4 per cent). And in 2015, global oil demand is projected to expand by 1.4mb/d (1.5 per cent) on 2014 to 94.1 mb/d, with emerging market economies leading the way. Demand from OECD economies, in contrast, is forecast to decline.

World oil supply

Total OPEC crude output (including Iraq) in June fell by 186,000 b/d compared to the previous month, to 30.6 mb/d, according to OPEC data obtained through direct communication. This comes despite an increase in output from swing producer Saudi Arabia, which ramped up production by 75,000 b/d to approximately 9.8 mb/d in June ahead of the summer peak electricity demand season and in response to extra refinery demand. This is the largest production increase since February and the third consecutive month that Saudi Arabia has increased its output. Production gains were also observed in Angola, Libya and Qatar. In Libya, production restarted at the 130,000 b/d El-Feel field and at the 340,000 b/d Al-Sharara field, Libya's largest.

In contrast, Kuwait, Iran and Iraq experienced production declines. Kuwait's oil output, at 2.8 mb/d, is at its lowest level since March 2013. In Iraq, meanwhile, production declined by 70,000 b/d as skirmishes between ISIS insurgents and the Iraqi army forced the closure of the 300,000 b/d Baiji oil refinery and a cut in the supply of crude oil feed from Kirkuk fields. Kirkuk crude has effectively been grounded since March when its main export channel, the Kirkuk-Ceyhan pipeline, was sabotaged. 

Non-OPEC supplies are projected to increase by 1.4 mb/d to 56.3 mb/d in 2014 and by 1.2 mb/d to 57.5 mb/d in 2015. OECD Americas is to continue driving non-OPEC supply growth thanks to burgeoning production from unconventional sources such as tight oil and sand. From the projected increase in non-OPEC supplies this year and in 2015, 6.4 mb/d and 6.7 mb/d, respectively, are expected to come from OPEC natural gas liquids (NGLs, not subject to quotas). Therefore, in order to balance the market, the 'call on OPEC crude and stock change' would need to be in the region of 29.9 mb/d in 2014 and 29.8 mb/d in 2015, according to the IEA.

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Source: CPI Financial

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