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Why this oil rally will not last



After weeks of sluggishness, the oil market is tightening again. But we do not know how long the upward cycle will last. OPEC admitted this week that it may be necessary to maintain production cuts, perhaps beyond the last extension, due to soaring American shale production.

The combination of geopolitical tensions in the Persian Gulf, failures in Venezuela and Iran, an expected decline in Federal Reserve interest rates, and a storm in the Gulf of Mexico have led to sharp price increases. oil in recent days.

The rally may well have some way to go, as Standard Chartered said in a recent note to customers. "We think the recovery is likely to continue, allowing Brent to well over 70 USD / bbl and WTI to exceed 65 USD / b," wrote the investment bank. "The fundamentals are favorable in the third quarter; we expect a global supply deficit of 0.5 million barrels / day, "while IEA and OPEC data suggest an even larger deficit, analysts said from Standard Chartered.

They are not alone. The EIA has announced a huge drop in its stocks of 9.5 million barrels last week. "This fourth consecutive weekly drop in crude oil inventories in the United States shows that the US oil market is also closing," said Commerzbank. Storms in the Gulf of Mexico and growing tension in the Middle East are also bullish factors. "The general situation suggests a further rise in oil prices in the short term," concluded Commerzbank.

However, some of these factors are temporary and could disappear, especially with a rapid increase in shale supply. In its latest oil market report, OPEC outlined the challenge faced by oil exporters. Demand growth could only reach 1.14 million barrels per day (Mb / d) this year, but growth in supply from only non-OPEC countries could exceed 2.05 Mb / j. Next year, the non-OPEC supply could further increase by 2.4 Mb / d, while demand would increase more than 1.14 Mb / d. Related: OPEC: Where will most new oils come from in 2020

In other words, OPEC + is likely to face cuts in production, forced to perpetually expand them as part of a sisyphean attempt to prevent oil prices from collapsing. The reduction in supply actually places a floor below prices, but this only reinforces shale drilling.

"Infrastructure constraints – including pipeline capacity in the Permian, the downward trend in the number of rigs, the decline in activity of service companies and the reduction of fracturing – indicate a slowdown in growth in 2019, "writes the OPEC in its report. "However…[w]With 2.5 mb / d of new pipeline capacity between the Permian and the USGC, output of the Permian Basin boom is expected to grow without any constraint. More pipelines mean more drilling, which ultimately means more supply in the global market.

New export terminals are also coming into play. "The extension of the pipeline as well as the port improvements intended to increase exports – especially to Corpus Christi – are expected to rise to a current level of about $ 9 billion. about 1 Mb / d to about 2.9 Mb / d by the end of 2020, "said OPEC. Related: The oil jumps on heavy crude

The riddle of OPEC is extreme. Although written in the bland language of a typical forecast, the July OPEC report offered rather dark prospects for the cartel. "Demand for OPEC crude oil for 2019 has been revised upwards by 0.1 Mb / d compared to the previous report, to stand at 30.6 Mb / d, or 1, 0 Mb / d less than the 2018 level, "says the report. "Based on early forecasts of global oil demand and non-OPEC supply for 2020, OPEC's crude oil demand for 2020 is expected to be 29.3 mb / yr. j, 1.3 mb / d less than the 2019 level. "

In other words, while American shale continues to grow at a steady pace, OPEC faces the possibility that its production cuts are not enough to balance the market. Does the OPEC suggest that it may be necessary not only to prolong production cuts, but also to reduce production in 2020? Time will tell, but the first look at next year's supply / demand figures is not encouraging if you are a member of the deal.

By Nick Cunningham from Oilprice.com

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