LONDON (Reuters) - Oil prices have stalled over the last two months as the prospect of tough sanctions on Iran’s exports from November is offset by concerns about a slowdown in global economic growth later in 2018 and 2019.
Brent futures prices for crude delivered in 2019 have been flat since late May, after rising strongly since February, with the calendar strip steadying around $71-73 per barrel.
The U.S. government estimates Iran’s oil exports will be cut by between 0.7 and 1.0 million barrels per day from November as a result of sanctions (“U.S. forecasts 50 percent cut in Iran oil sales”, Bloomberg, Aug. 10).
But the prospective loss of crude has failed to lift prices as traders focus on compensating increases in production from Saudi Arabia and Russia, as well as slower growth in consumption.
Brent’s six-month calendar spread has slumped from a steep backwardation in April and May into a contango structure as traders anticipate more oil availability.
Some of the shift stems from the big increase in production by Saudi Arabia and Russia that started in late May and June, which should help build up stocks ahead of the reimposition of sanctions in November.
But it also coincides with a weakening of the global economic outlook that suggests slower growth in consumption of diesel and other refined products later this year and into 2019.
The Organization for Economic Cooperation and Development’s composite leading indicator has slipped since the start of the year and “is pointing tentatively to easing growth momentum in the OECD area as a whole”.
Growth is easing in Canada, Germany, France and Britain though it remains stable in the United States and Japan (“Composite Leading Indicators,” OECD, Aug. 8).
The World Trade Organization’s trade outlook indicator also points to a slowdown in the momentum of global trade growth in the months ahead (“World Trade Outlook Indicator”, WTO, Aug. 9).
Export orders have declined steadily since the start of the year, while air freight volumes and container port throughput are growing above trend but appear past their peak, according to the WTO.
The WTO notes air freight has proven to be a timely indicator of overall world trade and an early signal of turning points in economic activity.
In that context, the International Air Transport Association’s monthly update shows air freight volumes growing more slowly than in 2016/17.
The inventory restocking cycle was mostly completed by the end of 2017, according to the association (“Air cargo volumes continue their modest uptrend, amid rising risks”, IATA, Aug. 9).
“Moreover, the loss of momentum in air freight demand is also consistent with the broad-based moderation in manufacturing firms’ export order books since the start of 2018.”
The prospective deceleration in global trade growth has been reflected in lower diesel prices since the end of May as traders anticipate consumption will advance more slowly than before.
Diesel, jet fuel and other mid-distillates are more sensitive to the economic cycle and freight movements than any other part of the oil market.
The gross refining margin for low-sulphur distillate delivered in April 2019, after next winter, has tumbled over the last three months on the weaker freight outlook.
The oil market is now delicately poised between a mildly tightening production outlook (with partially effective Iran sanctions) and a mildly deteriorating consumption outlook (with somewhat slower growth).
The International Energy Agency warned on Friday that “trade tensions might escalate and lead to slower economic growth, and in turn lower oil demand” (“Oil Market Report,” IEA, Aug. 10).
“For now, we have made no changes to our underlying economic and oil demand assumptions, but we are mindful that demand growth could cool down later this year and into 2019”, the IEA added.
John Kemp is a Reuters market analyst. The views expressed are his own.
- Distillates hold key to oil prices and global growth (Reuters, Aug. 1)
- World trade points to slowing economic expansion (Reuters, July 26)
Editing by Dale Hudson