The Atlantic Basin crude overhang is slowly starting to move east, but the worry now is that the excess will simply sit in Asian waters. The oversupply primarily consists of light crudes, including Ekofisk, Murban, Al Shaheen and Nigerian grades. Medium sours are faring better as Iranian exports are coming off slowly but surely. Indeed, despite a sharp narrowing of Brent-Dubai, which is leading to the brisk sale of Angolan and Urals crude, Dubai timespreads have recovered.
Still, crude demand is yet to pick up materially as we are still trading turnaround barrels. The recent reduction made to Saudi OSPs should be viewed in this context, but it is also true that the Kingdom has struggled to sell its oil in the summer due to sky high OSPs and so had to cut them. That said, while exports have underperformed expectations, production in July was higher than the 10.3 mb/d claimed by sources in the Kingdom, as storage was filled at both home and abroad.
Once refineries start to purchase barrels for arrival in November and beyond, we expect to see crude demand rise (just as Iranian exports fall off sharply), as margins have recovered, amid low product stocks and a strong pick-up in end-user demand following the soft patch in April and May. Economic data are still robust, despite being at the late stage of the current economic cycle.
A full-fledged trade war would be extremely damaging for demand but we’re not there yet. Concurrently, the market is also worried that rising economic hardship will make Iran come to the negotiating table. But Iran’s fiscal health is stronger today than in 2014–16 and oil revenues are still higher than in 2016. The temporary Houthi ceasefire (which has allowed Saudi to resume shipments through the Bab el-Mandeb) and the setback in Syria are both due to local factors.
|US GDP, y/y, %||Iran export revenues, $ billion|
|Source: US BEA, Energy Aspects||Source: Iran central bank, Energy Aspects|