Oil to trade higher on supply concerns

Abu Dhabi: Oil prices are expected to trade high in the third quarter due to declining stocks as well as supply concerns in Iran, Venezuela and Libya, analysts said.

There are additional supply concerns in Iran due to reimposition of sanctions by the US president Donald Trump over the country’s controversial nuclear enrichment programme. Trump pulled out of Iran nuclear deal earlier this year and asked all countries importing oil from Islamic republic to completely halt purchases by November 4 or face US financial measures with no exemptions.

“The impact of US sanctions on Iran have granted strength to oil prices as market prices in on the possibility of a supply squeeze. Crude oil fundamentals further support the case for higher prices as global oil demand growth remain robust along with declining in OECD [Organisation for Economic Co-operation and Development] stockpile levels,” said Benjamin Lu, commodities analyst from Singapore based Pillip Futures.

In Venezuela, production is expected to decline to less than one million barrels per day by the end of 2018 as the country goes through an economic turmoil. In Libya, the ongoing conflict is creating problems for crude exports.

The global benchmark Brent crude is currently trading above $77 (Dh283) per barrel and US crude West Texas Intermediate at about $74 per barrel.

Energy consultancy FGE predicts oil prices to touch $100 per barrel if there are further supply disruptions.

“There is simply not enough capacity to make up for Iran’s crude losses, plus Venezuela and Libya. This simply leaves us with practically zero available spare capacity by the end of the year. Any additional supply shocks will send prices through the roof,” Fereidun Fesharaki and James Davis from FGE wrote in a note.

UAE capacity

The two analysts also added that to keep the market balanced through the end of the year, Saudi Arabia, Russia and other Opec, non-Opec countries that have spare capacity will need to raise output by nearly 2 million barrels per day, twice the volume that Opec ministers said they would increase production at Vienna meeting last month.

The UAE capacity is rising to 3.5 million barrels per day by end of 2018 but the current number is around 3.2 million barrels per day and Kuwait has 300,000 barrels per day of space capacity.

Russia has the capacity to increase production by 200,000 to 300,000 barrels per day, while Saudi Arabia, the de facto Opec leader has an additional excess capacity of 200,000 barrels per day. The country’s production is likely to reach 10.8 million barrels per day in July.

“The critical concern is that by increasing output to near maximum levels, there would be little extra headroom to manoeuvre to counter any global geopolitical or unplanned supply outages, examples include Venezuela, Libya, Iran, Kazakhstan, Canada, and even the US during hurricane season,” said Ehsan Khoman Director, Head of Research and Strategist for Mena at MUFG.

This article provided by NewsEdge.