Oil price movement and key influences through Q3 2019

• DOI: http://doi.org/10.1111/oet.12738
• Date: 01 October 2019
• Published date: 01 October 2019

EDITORIAL

Oil price movement and key influences through Q3 2019

Crude markets have been dominated over the last 3 months

by a combination of demand weakness related to slowing

economic growth, and rising tension in the Middle East

Gulf, although prices ended little changed on the quarter.

Spot gas prices remained near record lows until mid-

September in all regional markets, as new liquefied natural

gas supply capacity additions outpaced demand growth.

1|JULY

In the first week of July, tensions in the Mideast rose, helping

support prices. Incidents included the shooting down of an

Iranian drone by the United States, followed by the seizure near

Gibraltar of an Iranian super-tanker on route to Syria. This was

followed by a retaliatory capture by Iran of a British-owned

tanker in the Strait of Hormuz. The events pushed Brent prices

up from around $65/bbl at the beginning of the month to their

highest point of the month at $67.01/bbl on 10 July.

The escalating tensions pushed up insurance rates and led

some Asian refiners to look at alternative crude sources and

boost safety measures, with many fearing worse to come.

The United States said it wanted a broader multinational

maritime effort to increase security of shipping lanes in

the Gulf, the Strait of Hormuz, the Bab el-Mandeb Strait and

the Gulf of Oman, with partners from Europe, Asia, and the

Middle East.

In the second week of July, supply was also affected by

shut-ins linked to Hurricane Barry in the Gulf of Mexico,

amounting to 2 mn bpd or so, which helped tighten markets

for a few days. As production came back onstream, crude oil

prices slumped to their lowest levels since mid-June, revers-

ing early gains, largely due to demand concerns linked to

poor economic data and weakness in equity markets.

In the third week of July, September Brent dipped to

$61.93b/bl on the 18th. But there was then some support

from Asian refiners as they increased demand in response to

a sharp rise in Asian refining margins—which tripled from

May/June levels as a result of tightened fuel supply and

refinery output cuts. The Singapore complex refining margin

rose to $9.37/bbl on 18 July, compared to $2.74/bbl in late

June. The high runs and another major new refinery coming

online helped Chinese gasoline exports rise in July and

August to near-record levels of 1.5 mn tonnes/mo, with

flows to Mexico, Chile and Nigeria.

In the last full week of July, the spread between crude

and products narrowed as additional product came on the

market following the rise in refinery runs in Asia and com-

pletion of maintenance in Europe. Demand proved weaker

than expected, failing to soak up the additional cargoes—

which partially reversed the refinery margin gains seen ear-

lier in the month. At the end of the month, the on-going ten-

sions in the Middle East and continued tight adherence to

OPEC-led supply constraint supported crude prices, with

September Brent moving above $65/bbl again.

2|AUGUST

August began with a seventh consecutive weekly crude

stock draw in the United States, which was bullish. The

draw-down put US inventories just 1.7% above the five-year

average on 1 August, the tightest overhang since mid-April.

However, the main driver of prices in the first week of the

month was rising concern over trade and economic growth

(which could affect demand for oil), which saw prices fall

through the week.

President Trump announced US sanctions on another

$300 bn worth of Chinese imports, which sent equity mar-

kets plunging. A strengthening US dollar also put downward

pressure on crude prices, as its cost in non-dollar currencies

rose. Prices fell steadily from $65/bl at the beginning of the

month to bottom out on 7 August, when front-month Brent

and WTI futures settled at their lowest levels since early

January at $56.23/bbl and $51.09/bbl, respectively.

The price slide came despite Iranian exports falling well

below 500 000 bpd, and OPEC and 10 non-OPEC partners

continuing to over-comply with their agreed 1.2 mn bpd

supply cuts. As prices fell, Saudi Arabia signaled it would

take steps to stabilize the market—although OPEC's market

share has already fallen to 30%, the lowest level in many

years.

In the second week of August, crude bounced briefly

on the 13th, as the US announced some delays and

exemptions to tariffs on Chinese imports. But it quickly

fell back on weaker economic growth numbers—cutting

oil demand growth forecasts. Germany's Q2 2019 GDP

contracted 0.1% compared to Q1, and China's industrial

output growth in July stood at just 4.8% year on year—the

lowest growth in 17 years and well down on forecasts of

EDITORIAL 11