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Why this oil rally is not permanent

After weeks of cloudiness, the oil market is picking up again. However, it is not clear how long the upcycle will last. OPEC admitted this week that it may need to maintain production cuts, possibly beyond its recent expansion, as US shale production is rising sharply.

A combination of geopolitical tensions in the Persian Gulf, defaults in Venezuela and Iran, u The Federal Reserve's upcoming Fed rate cut and the Gulf of Mexico's brewing tower have led to sharp oil price increases in recent days.

The rally could, as Standard Chartered put it, "go further" in a recent note to customers. "We believe the rally will continue, allowing Brent to test well above $ 70 / barrel and WTI above $ 65 / barrel," the investment bank said. "Fundamentals support the third quarter. We forecast a global supply deficit of 0.5 million barrels per day (MB / day). "IEA and OPEC data indicate an even greater deficit, according to Standard Chartered analysts.

You are not alone. The EIA reported a massive drop in inventories of 9.5 million barrels last week. "This fourth weekly decline in US crude oil stocks in a row shows that the US oil market is also narrowing," said Commerzbank. Storms in the Gulf of Mexico and rising tensions in the Middle East are also bullish factors. "The overall situation points in the short term to a further increase in oil prices," concluded Commerzbank.

However, some of these transient factors could dissipate, especially if the slate supply is still growing rapidly. In the recent OPEC oil market report, the group has set out the challenge that oil exporters face. Demand growth is expected to reach only 1

.14 million barrels per day (mb / d) this year, but supply growth from non-OPEC countries alone could exceed 2.05 mb / d. Next year, non-OPEC supply could increase by a further 2.4 Mbps, with demand again increasing by only 1.14 Mbps / day. See also: OPEC: In 2020 most of the new oil will come here.

In other words, OPEC + could stick to production cuts and be forced to extend them in a Sisyphean attempt to prevent oil prices from collapsing. The supply bottlenecks are weighing on prices, but only contribute to more shale drilling being carried out.

"Infrastructure constraints – in particular Perm pipeline capacity, decreasing rig numbers, lower activity of service companies and less fracking – indicate a slowdown in growth in 2019," OPEC wrote in its report. "However … [w] production from the booming Perm Basin with an expected new pipeline capacity of 2.5 mb / d from Perm to USGC is expected to grow unrestricted." More pipelines mean more drilling, which ultimately means more supply hits on the world market ,

Also new export terminals come into play. "The pipeline expansion and port expansions for more exports – particularly in Corpus Christi – are expected to increase from the current 1 Mbit / day to about 2.9 Mbit / day by the end of 2020," said OPEC. See also: Oil jumps at high crude oil price

The puzzle of the OPEC is great. Although the OPEC report was written in the boring language of a typical forecast, it offered a rather gloomy outlook for the cartel. "The demand for OPEC crude for 2019 has been revised up from the previous report by 0.1 MB / day to 30.6 MB / day, 1.0 MB / day less than in 2018," the report said , "Based on the first forecasts for global oil demand and non-OPEC supply for 2020, demand for OPEC crude is projected to be 29.3 mb / d in 2020, 1.3 mb / d less than in 2019." [19659002] In other words, as US shale continues to grow rapidly, OPEC faces the possibility that its production cuts will be insufficient to balance the market. Is OPEC proposing not only to extend production cuts, but to further reduce production in 2020? Time will tell, but the first look at next year's supply / demand numbers is not encouraging if you are a member of the cartel.

By Nick Cunningham of Oilprice.com

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