Oil markets still pressured by persistent risk of oversupply


Brent futures returned to positive growth last week and increased by almost 2% after four weeks of decline, while the WTI continued its downward trend. Oil markets were still pressured by the persistent risk of oversupply, as large producers are expected to increase production anticipating the impact of US sanctions on Iran. Trade tensions between the US and its economic partners are also weighing down on prices due to the potential impact on economic growth and energy demand. A drop in US stock markets after poor quarterly results of some tech giants also dragged prices down.

Other factors lent support to oil prices benefiting mainly the Brent benchmark. Economic trade tensions were seen easing at the end of the week as an unexpected agreement was reached between the US and the EU. The US economy grew in Q2 by 4.1%, which is a figure not seen in the past four years, but this level came in line with expectations. An attack by the Houthis on two crude oil vessels in the Red Sea forced Saudi Arabia to halt oil shipments through Bab Al Mendeb strait, which saw 4.8 mbpd of crude oil shipped through it in 2016. Reports from China are pointing to some economic policy shifts to support growth, including an infrastructure spending increase which will push up China’s demand. US crude stocks fell in the week of July 20th by 6.1mn barrels, while US drillers added another three rigs to their oil drilling inventory.

The sharp fall in US oil stocks is tempering concerns of oversupply and indicating that the global supply-demand picture may remain favourable. Nonetheless, recent output increases by some major producers are working to bring back the 100% compliance rate as agreed by Opec and its allies. However, the market would need to see other significant production increases to fully undermine this situation, as the November deadline of the implementation of US sanctions on Iran is approaching.


Asian spot LNG prices bounced back last week and gained 2.6% after five weeks of decline, which saw them losing 18% since mid-June. The support came from hot weather hitting North East Asia including Japan, South Korea and parts of China. High temperatures in Japan forced utility suppliers to restart oil- and gas-fired power plants, that were previously left on standby, back to production.On the contrary, South Korea is not expected to record higher gas demand as some nuclear reactors have been brought back online, leaving only six offline for the rest of the year. On the supply side, more shipments are expected from Russia as the second train of Yamal LNG is thought to have started production ahead of schedule, while first gas at Ichthys plant in Australia is expected in September.

In the US, Henry Hub natural gas futures also rose by more than 2% last week, which is the biggest weekly gain since mid-June. Volatility in US gas price is considered low as record US gas production is neutralising the 20% deficit in gas storage. In the UK, gas prices remained almost unchanged at the end of the week, despite reduced supply due to outages and a strike in fields that represent 10% of British gas production. Expectations of higher output from wind energy generation in coming days and strong gas flows from Norway may lead to an oversupplied system. This article was supplied by the Abdullah bin Hamad Al-Attiyah International Foundation for Energy and Sustainable Development.

Sources and photo-credits: Gulf Times