Oil: From shortage to surplus?

There are signs that Saudi Arabia was supplying more oil to the market than agreed

Carsten Menke, OpinionIndustry Expert
Carsten Menke joined Bank Julius Baer in December 2009. In his current position, he is responsible for the analysis of commodity markets, in particular base metals and precious metals. Before moving to Bank Julius Baer, Carsten Menke worked at Sal. Oppenheim Jr. & Cie. in Cologne, where he set up the Commodity Research unit. In 2002, he started working for Deutsche Bank as a Relationship Manager and became investment advisor in 2003. He received his degree in Business Administration at the University of Cologne in 2007 and became a CFA Charterholder in 2011.

July 17, 2018

The perception in the oil market seems to be shifting. Fears of shortages, which pushed prices as high as $80 per barrel in early summer, are receding and concerns about looming surpluses growing.

Last week’s slide was triggered by recovering Libyan exports and prices were down another 4.6 percent yesterday on signs that Saudi Arabia was supplying more oil to the market than agreed by the petro-nations. While interesting from a geopolitical point of view, the key question is not whether this is to please President Trump and satisfy his wish of lower oil prices but what a unilateral decision by Saudi Arabia means for the petro-nations’ supply deal.

Others could be inclined to pump more, leading to a bigger supply response than agreed at the petro-nations’ meeting at the end of June. This would accelerate the oil market’s shift back into surplus, not least due to US shale oil.

Drilling and profitability support ongoing U.S. oil output growth. Capital discipline and cost inflation are unlikely limiting factors, but infrastructure constraints are a near-term challenge.

Fundamentally, the market should be sufficiently supplied going forward unless it has to go without Iranian and much less Venezuelan oil. High uncertainty due to difficult-to-predict political factors still clouds the near-term outlook, supporting our neutral view.

As prices are now back in line with fundamentally justified levels, the recent slide does not present a buying opportunity.

The perception in the oil market seems to be shifting. Concerns about surpluses are growing on signs that Saudi Arabia was supplying more oil to the market than agreed. Facing high uncertainties and difficult-to-predict political factors, we remain neutral on oil.

Any opinions expressed here are the author’s own.

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