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FUJAIRAH, Oct 2 (Reuters) – The unwinding of OPEC+ production cuts, China storage flows and geopolitical tensions have been the primary drivers of crude oil prices this year, and are likely to remain so for the foreseeable future.
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Knowing what is influencing the market is one thing. Predicting with any accuracy how these factors will develop is another entirely.
The problem for the crude industry is that all three of these factors are inherently unpredictable and subject to fairly rapid changes, which makes forecasting the current market even more of a mug’s game than it usually is.
This contradiction was evident during workshops and discussions at the Energy Markets Forum held this week in the oil storage and shipment hub of Fujairah in the United Arab Emirates.
While conferences usually feature both bullish and bearish proponents, the level of uncertainty over the outlook for the next two or three quarters was marked.
The three factors currently shaping crude markets also tend to work in opposite directions when it comes to prices.
The unwinding this year of 2.2 million barrels per day of voluntary output curbs by eight members of OPEC+, with a further 137,000 bpd due in October, is theoretically bearish for prices, as it is far from certain that global demand is rising fast enough to absorb the extra oil.
But the situation is complicated by the actual rise in exports from the group not matching the allowed increases in production.
Analysts and industry sources estimate that the eight OPEC+ exporters have delivered about three-quarters of the extra oil output it targeted since the group started easing production curbs in April.
This means that some 500,000 bpd, which is about 0.5% of global demand, that was expected to hit the market has not arrived.
In effect, the lifting of OPEC+ production quotas has turned out to be bullish for prices, rather than bearish.
This may mean that even if the eight OPEC+ members agree at a meeting this weekend to further increase production quotas, the market reaction may be muted as participants wait to see how much extra oil actually becomes available.
CHINA STORAGE
The volume of crude being stored this year by China is largely seen as a bullish factor at least in the short term as it soaks up any excess crude and has worked to keep the price of benchmark Brent futures anchored in a narrow range around $65 to $70 a barrel in recent months.
China doesn’t disclose the volume of crude flowing into commercial and strategic storages, but an estimate of the surplus can be made by subtracting the volume of oil processed by refineries from the total available from imports and domestic output.
On this basis, it is likely that China was building stockpiles by at least 500,000 bpd so far this year.
But given the lack of transparency in the process, it is difficult to predict whether China will continue to build inventories, or whether they will pull back.
In some ways the best predictor is price, as China does have a track record of buying extra crude when prices are low, but drawing on inventories when prices rise.
This dynamic may have played out in September, with LSEG Oil Research estimating China’s crude imports dropped to around 10.83 million bpd from 11.65 million bpd in August, the lowest since February.
The decline in September imports comes after oil prices spiked higher in June amid the conflict between Israel and Iran, which is also the time that September-arriving cargoes would have been arranged.
The brief conflict between Israel and Iran also serves as a reminder that geopolitics have played a bigger role this year, and remain an unpredictable factor.
In addition to tensions in the Middle East, there are also Ukraine’s attacks on Russian oil refineries, and the economic uncertainty created by the trade wars launched by U.S. President Donald Trump.
The impact of these events is also uncertain. For example, damaging Russia’s refineries is likely to cut its exports of refined fuels, but may increase shipments of crude oil, a combination that would likely lead to rising refining margins.
Uncertainty can lead to price volatility, but it may also result in market players being cautious and unwilling to push too hard in either direction as they await hard data on which factor is likely to gain the upper hand.
The views expressed here are those of the author, a columnist for Reuters.
Editing by Jan Harvey
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