Oil slips but disruptions and record demand limits losses

Singapore — US oil prices dipped away from three-and-a-half year highs on Thursday amid high output from Russia, the US and Saudi Arabia, although unplanned supply disruptions elsewhere and record demand stemmed a bigger decline.

US West Texas Intermediate (WTI) crude futures were at $72.54 a barrel at 2.53am GMT, down 22c, or 0.3% from their last settlement. WTI hit its highest since November 2014 at $73.06 a barrel in the previous session.

Brent crude futures were at $77.54 a barrel, down 8c from their last close.

Oil prices have been rallying for much of 2018 on tightening market conditions due to record demand and voluntary supply cuts led by the Middle East dominated producer cartel Opec.

Unplanned supply disruptions from Canada to Libya and Venezuela have added to those cuts.

Yet not all indicators point towards an ever-tightening market.

Although output growth is slowing, US crude production is approaching 11-million barrels a day.

With Russia and Saudi Arabia at similar levels, and output expected to rise as Opec and Russia ease their supply restrictions, there will soon be three countries pumping out 11-million barrels of crude each and every day.

This unprecedented output means just three countries are meeting a third of world consumption.

Despite this, analysts warn that the market has little spare capacity to deal with further disruptions.

“With inventories still declining and spare capacity uncomfortably low, there is very little cushion for any supply disruption caused by rising geopolitical risks,” ANZ bank said in a report published on Thursday.

US inventories fall

Despite rising US output, US commercial crude oil inventories dropped by almost 10-million barrels in the week to June 22, to 416.64-million barrels, according to the Energy Information Administration (EIA) on Wednesday.

Traders expect inventories to draw further in coming weeks as an outage of Canada’s Syncrude locks in more than 300,000 barrels a day of production. The outage is expected to last at least through July, according to operator Suncot.

The stock draw was also due to high exports of almost 3-million barrels a day, coupled with domestic refinery activity hitting a utilization rate of 97.5%, the highest in at least a decade.

Oil demand has been chasing records for most of 2018, but the outlook is dimming amid escalating trade disputes between the US and other major economies including China and the EU.

“Our macroeconomic view remains overwhelmingly bearish,” commodity brokerage Marex Spectron said.

Shipping brokerage Eastport said in a note on Thursday that economic growth could be eroded as “increasing worries about the trade tensions could curtail investments and spending”.

Reuters