RIYADH: Oil markets are set for a rough ride.

The ongoing Greek financial soap opera, prospect of a deal between Iran and the west, resilient production from US shale, increasing output from Opec, cooling down of the Chinese dragon and high inventory levels both in the US and Europe - all appear weighing heavily on crude markets.

The financial turmoil in Greece is a major drag on crude markets, impacting both supply and demand fundamentals. It is dragging down global equity and commodity markets, spooking investors fearing a broader contagion. The crisis could hit the value of the euro, making the US dollar attractive, both as a safe haven and as an investment vehicle. If the dollar appreciates, that will push down oil — since oil is priced in dollars.

Iran nuclear talks is also under spotlight. Markets are awaiting, rather impatiently, to see if Iran and major world powers can reach a deal on Tehran’s nuclear programme. An agreement could put one million barrels of Iranian crude back on the market eventually.

Should negotiators reach a deal, in addition to a possible increase in output, Iran could also unleash an estimated 30 million to 40 million barrels of oil now stored on tankers. “It’s a substantial amount of oil. It could potentially move the market out of the current range,” Patti Domm quoted Michael Cohen, head of energy commodities research at Barclays, as saying.

“This may be the time when we break lower and into the $50s,” Bjarne Schieldrop, head of commodity analysis at SEB in Oslo emphasised.

Again Capital analyst John Kilduff told CNBC if talks actually fell apart altogether, the price of oil could immediately jump $10 a barrel. “The knee jerk is going to be higher (prices). Also, I would assume relations will deteriorate between the US and Iran, and maybe others, and that will raise the security premium for potential military action that Israel will push for,” he added.

And in the meantime, the share battle, between the Opec and non-Opec producers continues unabated. A rebound in US drilling rig number last week, after a 29 weeks siesta, added to signs that shale producers will keep pumping into an oversupplied market. The US output already last week touched the 40-year high of 9.6 million barrels per day (bpd).

Opec oil supply was also at a three-year high, close to 2.5 million bpd above the call on its crude, a Reuters survey showed. The Saudi production has also been on rise, touching the 10.3 million bpd in May as compared to 9.69 million bpd a year earlier.

All this is contributing to the market glut.

In the meantime, China’s crude appetite is slowing. It’s economic growth has been cooling in recent years, with 2014 marking its slowest GDP growth rate in a quarter century- impacting the Chinese crude demand patterns too.

In the meantime, the Chinese stock market is increasingly looking like a bubble ready to pop.

Dangers from China’s volatile stock market come on top of some warning signs about its energy demand too. A new report from the Australian government raises concerns over China’s tepid demand for LNG.

China’s LNG consumption was expected to grow by more than 50 per cent between 2014 and 2016, but “downside risks appear to be growing,” the report finds. For the first time since 2006, China imported less LNG in the first quarter of 2015 compared to the same quarter in the year prior.

The spike experienced in Chinese imports in recent months until April was attributed to the ongoing stockpiling in strategic reserve — while the prices were lower. Once that gets stopped, its imports had to abate.

Elevated crude inventory levels are also adding to the pressure on crude markets. As more and more oil entered storage, it prompted refiners to stash oil on ships in the ocean. Inventories in Europe and South Korea are also reported to be very high.

Markets are in for some real battering.

Published in Dawn, July 5th, 2015

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