Weak demand, combined with more than enough oil production, caused the Brent oil price to drop below $100 per barrel (bbl), the lowest level in 14 months, according to a report.

Iraqi Kurdistan increased oil production and Libya also reported higher oil exports, as a result of which oil production from the Organisation of Petroleum Exporting Countries (Opec) reached 29.91 million barrels per day (mbd), said Energy Monitor’s September report.

Together with increased oil production in non-Opec countries, such as the US and Canada, created sufficient oil supply, while the price of the West Texas Intermediate (WTI) declined. However, this decline was not as strong, given the significant drop in inventories in Cushing, Oklahoma in recent months.

These inventories were partly transported via recently opened pipelines to the US refineries in the Gulf of Mexico region for processing, as this could lead to shortages in other parts of the US. The price difference between Brent and WTI (the Brent/WTI spread) dropped to the lowest level since September last year.

The geopolitical tensions around the globe has not caused the oil prices to rally and many large oil producers are directly or indirectly involved, said the report.

However, the fear that political decisions may lead to oil production shortages have eased and as a result, oil prices have not appreciated much, and the impact of these geopolitical tensions therefore seems limited.

In a normal situation, the effects of oversupply would have resulted in a much stronger price decline and therefore, the report believes that the geopolitical tensions are having an impact. While prices are not increasing, they are not declining either, it said.

Oil price forecast
Geopolitical tensions are hard to predict. However, normal supply and demand ratios can be fairly accurately forecasted. The effects of geopolitical unrest are included in risk scenarios.

Lower tensions could result in increased oil production and, therefore, a lower risk premium. This could trigger a faster and further decline in oil prices. At the same time, increased geopolitical tensions could lead to limitations in oil production and/or oil exports.

The demand for oil will rise at a moderate pace, said the report. Meanwhile, the oil supply will increase at a similar pace, mainly due to increased production in non-Opec countries and despite the oil production potential in some Opec countries.

Energy Monitor also expects the US dollar to appreciate, which would have a negative impact on US dollar-denominated commodities, including oil.

Stress postponed
The downward pressure on oil prices concerns oil for delivery in the near term. While tensions in oil producing countries do have a supportive effect on oil prices, the greatest impact is on oil with delivery in the longer term.

Until recently, prices for delivery in the near term were significantly higher than those for delivery in the longer term. This was the result of temporary uncertainty regarding oil production due to increasing violence in oil producing countries.

Near-term contango
The fact that the price of oil with delivery in two to six months is higher than the spot oil price is, the report believes, the result of lower tensions. This has led to the closure of many speculative long positions.

The trade volumes of Brent oil declined by more than 40 per cent compared to three months ago. Nevertheless, investors remain somewhat cautious. They are keeping open the possibility that there will be some type of escalation after all, and/or Russian sanctions on the EU. This is part of the reason why oil prices are higher for delivery in two to six months.

Some investors will try to benefit from this contango by buying oil now, storing it, and hoping for higher prices in the future. Too many of these speculative positions would result in a higher spot price, which would wipe out the contango.

Long-term backwardation

The oil prices with delivery in the near term are down as a result of weak demand and oversupply for now. In addition, prices with delivery after six months are in backwardation, that is, future price below current price. The market seems to expect the demand for oil will be balanced out by the amount of oil produced in the next few years.

However, in the longer term, which is more than two years, the effects of the crisis in Iraq as well as the sanctions against Russia could lead to significant problems. The uncertainties investors perceived for the near term appear to have been postponed and now could emerge at the back end of the curve.

Iraq had the ambition of tripling its oil production in the coming years. To meet the rise in global oil demand, Iraq needs to double its oil production over the next five years.

Due to the recent emergence of ISIS, oil production has not yet been affected. However, uncertainty about realising the needed significant increase in Iraqi oil production has risen. Iraqi oil production would have to double to help meet the rise in global oil demand, which is not fully covered by the oil production potential (spare production capacity) of Saudi Arabia and the expected increase in non-Opec production. - TradeArabia News Service