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Oil Gains Despite Potential Supply Glut on the Horizon

November 15, 2018

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Oil rose on Thursday, steadying after losing nearly 7 percent over the previous three days, though concern about the prospect of an oversupplied market next year continued to weigh on prices despite OPEC's message that it may cut crude output.

The Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, is considering a cut of up to 1.4 million barrels per day (bpd) next year to avoid the kind of build in global inventories that prompted the oil price to crash between 2014 and 2016.

Brent crude oil futures were last up 63 cents on the day at $66.75 a barrel at 1454 GMT, while U.S. crude futures rose 38 cents to $56.63.

"(A cut) helps, but based on my balances, I think we'll need to see 1.5 million bpd at least for the first half of the year. Words aren't going to work. The market is going to need to see action as well," said ING commodities strategist Warren Patterson.

The International Energy Agency (IEA) and OPEC this week warned of a sizeable surplus at least in the first half of 2019, and possibly beyond, given the pace of growth in non-OPEC production and slower demand in heavy consumers such as China and India.

"To avoid further price erosion, a production cut is a must. It is not only manifested in the demand for OPEC oil as estimated by forecasters, but also in OECD stock levels," said PVM Oil Associates strategist Tamas Varga.

The oil price has lost about a quarter of its value in only six weeks, pressured by a slowing global economy and soaring crude output led by the United States.

"It is no surprise that prices embarked on a counter-move given their dramatic slump in recent weeks," Commerzbank analysts said in a note.

The economic outlook, however, continues to pressure prices.

"Asian refiners and consumers we speak with are mentioning initial concerns of slowing demand," said Mike Corley, president of Mercatus Energy Advisors.

U.S. bank Morgan Stanley (MS) said on Wednesday that China's economic "conditions deteriorated materially" in the third quarter of 2018, while analysts at Capital Economics said China's "near-term economic outlook still remains downbeat".

China is the world's biggest oil importer and the second-largest crude consumer.

As a result, oil inventories are rising. The American Petroleum Institute said late on Wednesday that crude inventories rose by 8.8 million barrels in the week to Nov. 9 to 440.7 million, compared with analyst expectations for an increase of 3.2 million barrels.

"With inventories likely to build in 1Q19, prices could remain under pressure in the near term," Bernstein Energy analysts said in a note.

(Reuters, By Amanda Cooper, Additional reporting by Henning Gloystein and Anshuman Daga in SINGAPORE and Aaron Sheldrick in TOKYO Editing by David Goodman)

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