Iran sanctions, trade tensions, threaten oil supply, demand, IEA says

The International Energy Agency has warned that the U.S. sanctions on Iran could cause a spike in oil prices later this year, thus affecting the oil demand growth. Oil demand might also be hit by trade tensions.

In its report in for July released on Friday, IEA first said that previous concerns about the stability of oil supply had cooled down somewhat, “at least for now.”

“We have seen increases in production, mainly in Saudi Arabia and Russia, a surge in US exports in June that saw a record weekly average level of 3 mb/d, and a partial, but fragile, recovery in Libya. Ample supply has contributed to the Brent price falling from just over $79/bbl at the end of June to below $72/bbl earlier this week.

“This cooling down in prices is clearly welcome for consumers: the biggest single product market in the world is US gasoline and the national average price increase seen during the spring seems to have stalled for the time being,” IEA said.

For the time being, IEA said that the demand growth – the global number for 2018 – looks solid for now at 1.4 mb/d.

However, IEA said, as we move through 2Q18 and 3Q18, growth is estimated at only 1 mb/d, partly due to comparisons with high year-ago demand levels and because prices (based on Brent crude) have typically been about 45% higher.

“In OECD Europe, oil demand fell below last year’s level in 2Q18, and in the US falling gasoline demand has contributed to more than the halving of total demand growth in 2Q18 versus 1Q18. The two leading non-OECD oil markets, China and India, both remain on course to grow solidly this year, although data issues with respect to China cloud the picture to some extent.

IEA said that some developing countries are taking steps to shield consumers from higher prices.

“An example is Indonesia where plans are being made to increase sharply subsidies to maintain diesel and gasoline prices at current levels,” IEA added.

Demand revised upwards for 2019, but supply disruptions loom

For 2019 demand growth, IEA has revised its outlook slightly upwards by 110 kb/d, partly influenced by the downward movement of the forward price curve.

“Even so, there are considerable uncertainties. The risks to stable supply that will grow later this year could cause higher prices and thus impact demand growth,” IEA added.

Another factor to consider is that trade tensions might escalate and lead to slower economic growth, and in turn lower oil demand. Trade tensions partly explain why the International Monetary Fund, in its recent World Economic Outlook Update, said, “The balance of [economic] risks has shifted further to the downside, including in the short term”.

“For now, we have made no changes to our underlying economic and oil demand assumptions, but we are mindful that demand growth could cool down later this year and into 2019. If this does happen, it might dampen to some extent the impact on prices of any supply pressures,” IEA said.

Low prices might not last

The recent cooling down of the market, with short-term supply tensions easing, currently lower prices, and lower demand growth might not last, the agency has warned.

“When we publish our next report in mid-September, we will be only six weeks away from the US’s deadline for Iran’s customers to cease oil purchases. As oil sanctions against Iran take effect, perhaps in combination with production problems elsewhere, maintaining global supply might be very challenging and would come at the expense of maintaining an adequate spare capacity cushion. Thus, the market outlook could be far less calm at that point than it is today,” IEA concluded.