Oil Prices Rise, IEA Warns Potential Market Disturbance

Oil prices edged higher on Friday, rebounding from earlier declines triggered by the International Energy Agency’s (IEA) warning about the recent calm in the market lasting for only a short period of time.

US West Texas Intermediate crude futures for September delivery rose 0.7 percent to $67.31 per barrel, while Brent oil futures for October settlement climbed 0.5 percent to $72.48 per barrel.

Prices fell earlier in the session after the IEA said the recent cooling down of oil markets, with short-term supply tensions easing, currently lower prices, and lower demand growth might not last.

Upcoming Disturbance in Oil Markets

IEA cautioned that the upcoming oil sanctions against Iran could cause disturbance to the market later this year. The new US sanctions due in November are poised to cut supplies of Iranian oil and are likely to raise the possibility of a global energy supply shortage.

Oil prices have increased nearly $80 per barrel, marking as their highest since 2014, due to concerns over supply shortages, but calmed in recent weeks as Libya recover some production loss and as the US suggested it could exempt Asian buyers of Iranian oil from sanctions for next year.

Still, the US would like the countries buying Iran’s oil to stop purchasing completely in the long run.

As oil sanctions against Iran take effect, perhaps in combination with production concerns elsewhere, preserving global supply may prove difficult and would come at the expense of maintaining enough spare capacity cushion, according to IEA.  

Iran is the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), producing about 4 million barrels per day (bpd) or 4 percent of global supply.

In an effort to prevent any possible supply shortage, Saudi Arabia made a promise to intervene. The country is producing around 10.4 million bpd and could theoretically lift production above 12 million bpd.

However, such action would result to the world having nearly zero spare capacity to minimize potential supply disruptions in producer countries such as Libya, Venezuela, or Nigeria.

The market outlook therefore, according to Paris-based IEA, may be far less calm at that point than it is today.

Besides supply fears, oil prices are being propped up by strong demand growth that has constantly been beneficial in recent years, even with a rebound in prices.

The IEA stick with its expectation of a 1.4 million bpd per barrel growth for this year, although it adjusted its 2019 forecast by about 110,000 bpd to 1.49 million bpd.

IEA also said the possibility of trade tensions between the US and China escalating is another factor to consider, as it could lead to slower economic growth thus, weakening demand of crude.

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