Predictions of an oil glut have dominated oil market reporting for months. Bloomberg this week suggested the first signs of oversupply may be emerging already, with several million barrels of Middle Eastern oil left unsold in the latest spot market cycle. Yet some analysts disagree that there is a danger of a glut—winter is coming and so is stocking up for heating season.
Somewhere between 6 million barrels and 12 million barrels of crude produced in the Middle East did not find buyers in the last spot market cycle, with deliveries for November, Bloomberg reported on Thursday, citing traders. The report speculated this could be the first sign of the long-awaited glut that pretty much everyone has been predicting, because buyers from India and China were reportedly not in a rush to purchase the cargoes.
The report also noted a flatter futures curve for the Abu Dhabi Murban blend, which used to be rather bullish but has softened lately, adding to signs of a possible oversupply—or perhaps just weakened demand for that particular blend of crude. And now refiners are expecting Saudi Arabia to raise its crude prices for Asia, which does not really suggest a glut but rather healthy demand for crude.
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Further, the backwardation for the November-December spread for crude at the end of September stood at $1 per barrel, Price Futures Group’s Phil Flynn wrote, as cited by Investing.com, noting that the development countered analyst predictions for a glut of oil emerging before the year’s end.
Separately, Flynn called the current situation in oil purgatory, writing “Oil prices are locked in a purgatory-like trading range where OPEC seems to want to keep prices in this range of pain —high enough for them to make money but low enough to squeeze US shale.”
“OPEC production increase rumors were quickly denied by the cartel, but one wonders about the timing of OPEC leaks that seem to keep coming at price levels that could, in theory, unleash US shale,” the analyst added.
The market is not “seeing the glut and it’s not evident yet in the physical market … it’s exaggerated”, Vanda Insights’ Vandana Hari told The National. “If China continues to buy for stockpiling, and I think they will … I see it as demand growth and a bullish signal,” Hari also said. The analyst noted the seasonal uptick in fuel oil demand for the Northern hemisphere as well, as the heating season begins.
Russia’s recent additional curbs on fuel exports have also countered the glut narrative. Moscow said it would extend a ban on gasoline exports until the end of the year and curb diesel exports, as previously announced by Deputy Prime Minister Alexander Novak. The curbs are seen as the result of Ukrainian drone attacks on Russian refineries and, as such, an indication of a future tightening of fuel supply on global markets.
Doubts about the glut predictions were evident earlier in the year as well. August oil export flows, for instance, trended above the ten-year average, but demand was pretty robust as well, absorbing the higher volumes.
“Despite fears that the swift unwinding of production cuts from the eight core OPEC+ members, and subsequent increased exports mainly from Saudi Arabia and the UAE could push crude markets into oversupply, this has not concretely materialised as of yet,” Vortexa analyst Mark Toth said in late August. The energy analytics firm also noted that demand for oil globally was strong enough to soak in the higher volumes produced in South America—often cited as the basis for the glut predictions, with a focus on Brazil and Guyana.
Now, there’s talk of further Western sanctions on Russia’s energy industry, which will also have a positive effect on prices as it potentially threatens supply availability. “The G7 is preparing tougher sanctions on Russia, targeting energy, finance, and defence sectors, while also weighing restrictions on countries and entities helping Russia bypass existing curbs,” MUFG analyst Soojin Kim said, as quoted by The National.
This automatically means upward pressure on oil prices, but this pressure tends to be limited because for all his rhetoric with regard to Russia and oil sanctions, President Trump has no interest in higher international oil prices, which would lift fuel prices at home, and traders are aware of that.
Besides, lately the effect of these announcements has been temporary as Vanda Insights’ Hari noted to The National, but it does suggest that the overall perception of oil markets is not exactly one of excess supply. Were that the case, prices wouldn’t move on any news about future sanctions that have so far failed to make a significant dent in Russian outflows. Similarly, prices have largely stopped reacting to OPEC’s production growth announcements—and that’s an even stronger signal that reports of a glut may be a bit premature.
What’s Next for Energy Markets?
A new conflict in the Middle East… a surprise OPEC+ decision… a massive shift in Chinese demand. Most investors only react to the headlines.
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By Irina Slav for Oilprice.com
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