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Oil market being steered higher but with shaky fundamentals

Heavy storm season is underway in the US and Hurricane Florence is threatening coastal states.
oil and gas operations
Brent crude hit above US$80 a barrel,

Higher oil prices and shaky fundamentals of supply and demand are the new dynamics on the oil market this week.

This happens in the midst of tremendous uncertainty and geopolitical instability and in early trading on Friday, Brent crude was priced above US$78 with WTI close to US$69 a barrel.

In midweek trading, the price for Brent crude hit above US$80 a barrel, but the profit takers moved in quickly and the price rebalanced by the end of the week.

American inventories were down again last week by 5.3 million barrels according to the US Energy Information Administration.

Hurricane surges

Heavy storm season is underway in the US and Hurricane Florence is threatening the coastal states of Carolina and Virginia this weekend.

While the oil facilities in the Gulf of Mexico are out of harm’s way, mass evacuations of more than a million people will mean a spike in gasoline demand as families drive to safety.

The key Colonial pipeline could take a hit and disrupt oil supplies of diesel and gasoline from Houston across some southern states to the East coast.

Meanwhile, other storms are hovering areas around the Gulf.

Oil production in the US has been growing at full speed in recent years and the country has now overtaken Russia and Saudi Arabia to become the world’s biggest oil producer.

The US Energy department released the figures this week, saying this is the highest amount of production since 1973.

Shale supporting US output

Investment in the US shale boom has helped keep production steady with US output doubling in the past 10 years.

Texas is the centre of this production with overall output in August close to 11 million barrels a day.

The EIA says it expects output to remain steady in years to come. Gasoline and distillate supplies are also abundant in the US this season.

The OPEC monthly oil market report says output increased in August as members continue to add oil to the market following the collective agreement in June.

The organisation cut its 2019 oil demand growth forecast to 1.41 million barrels a day, down 200,000 barrels a day from its last estimate.

The report cited challenges in developing and emerging markets that could weigh on overall economic growth.

The estimated world demand for oil will average 98.82 million barrels a day this year with an expectation of reaching over 100 million barrels a day in 2019.

Iran sanctions a key factor

The big risk premium built in to the oil price performance is the upcoming re-introduction of US sanctions on Iran.

Estimates from S&P Global Platts Analytics believe that 1.4 million barrels of Iranian crude will be off the market by November. 

Global buyers have been instructed to seek supplies elsewhere or face the wrath of a determined US President.

Already, Iranian output is slowing, with only 3.6 million barrels a day on the market in August, according to recent OPEC figures.

While the US have given India a temporary waiver for Iranian oil imports, the government has made it clear that it must curtail all imports in the near future.

India is currently importing more than 650,000 barrels a day of Iranian crude at an agreed discount, but trade sources from Reuters estimates that will fall by 45 percent in the near term.

With such uncertainty in the market, the remainder of the year will be a volatile time for the oil price.

Fragile economic forecasts, geopolitical risks and reduced oil availability from many producers all weigh on market sentiment.

With little spare capacity to manage any further outages, the bigger concern is back to security of supply in the months to come.

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