Drewry: Tight Supply to Keep Oil Prices Up in Q4

Tanker owners are gearing up for the seasonal surge in global demand for oil in the fourth quarter of 2018, which coincides with the entrance into force of US sanctions on Iran.

Iranian companies that are facing the new wave of sanctions following the 180-day wind-down period ending on November 4, 2018 are the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), among others.

The sanctions relate to petroleum transactions, including the purchase of petroleum, petroleum products, or petrochemical products from Iran, the Treasury Office informed.

Oil prices have already started to rise ahead of the deadline, according to shipping consultancy Drewry, even though the market remained well supplied.

Namely, despite a drop in production from Venezuela and most recently Iran, OPEC members managed to fill in the void. However, the real test will be maintaining that supply this winter, Drewry said.

According to the International Energy Agency (IEA), oil demand in the fourth quarter will rise by 500 kbpd (quarter on quarter) to 100.3 mbpd. Although non-OPEC supply and NGL production by OPEC members are expected to rise by 100 kbpd each, the market is estimated to need an extra 300 kbpd of crude from the cartel to meet the seasonal spike in demand.

In addition to the seasonal spike in demand, OPEC producers will also have to fill the loss of supplies from Iran and Venezuela in the coming months, Drewry added.  As disclosed, Venezuelan production, which declined to 1.24 mbpd in August from 1.6 mbpd at the beginning of the year, is likely to dip further to 1.1 mbpd in the fourth quarter.

As far as Iranian production is concerned, there is uncertainty regarding the actual impact of US sanctions, but the country’s oil production declined to 3.63 mbpd in August 2018 from 3.81 mbpd at the beginning of the year, data from the consultancy shows.

“Recently, the US has signalled that it will consider giving waivers on Iranian oil, but in our opinion the impact of sanctions is likely to be similar to that of 2012, when Iran’s output shrank by 1.2 mbpd. Thus, Iranian crude production could well decline to 2.6 mbpd in the fourth quarter,” Drewry said.

If this situation emerges OPEC producers will have to increase their production by close to 1.4 mbpd in the fourth quarter, the consultancy further added.

“The cartel’s spare capacity (excluding Iran) is around 2.5mbpd, and if OPEC increases production to keep the oil market well supplied, its spare capacity will be squeezed to close to 1mbpd in the fourth quarter. This will make the market susceptible to any supply outages in major oil producing countries such as Libya and Nigeria.

“As such, the threat to supply is likely to keep oil prices elevated in the fourth quarter. In this scenario we expect tight supply and backwardation in prices to lead to further inventory drawdown in the fourth quarter. Consequently, seasonal gains in oil trade and tanker rates could well be limited this winter,” Drewry concluded.