Rising oil prices due to the short-term impact of US sanctions may, however, create a medium-term challenge for demand growth. This as emerging markets, the main source of demand growth, suffer from a perfect storm of rising oil prices and weaker currencies.
We maintain the view that crude oil is likely to remain rangebound and that a potential spike above $80/b could turn out to be short-lived. While Brent crude trades well below the $110/b average seen between 2011 and 2014, some key oil-consuming nations are seeing prices in their local currencies at or even above that level.
Bloomberg’s intelligence unit in a recent update highlighted the risk to demand growth from a slowdown in demand from China’s strategic petroleum reserves (SPR) purchase programme. In it, they wrote: “China's SPR purchases have accounted for about a third of annual global oil demand growth since 2016. They could fall by as much as 85-90% as reserves approach sufficient energy security levels, barring a Chinese reassessment of its needs amid an escalating trade war”.
A slowdown of this magnitude would go a long way to offset the potential drop in supply from Iran. Such a development, together with the already heightened risks to overall demand going into 2019, could force a rethink of the medium-term price outlook and help send the price back down to $70/b and potentially even beyond.
While this is currently only speculation, the one thing that remains a fact is that Iran will suffer a further slowdown in production and exports over the coming months. Until hard data or monthly surveys from Opec and IEA begin to show demand softness, the upside risk will still be viewed as the direction of least resistance.
Later today at 15:00 CET (one day and half an hour later than usual) the Energy Information Administration will release its Weekly Petroleum Status Report. Crude oil has ticked a bit higher today ahead of the report on a combination of a softer dollar and surveys pointing to a third weekly drop in nationwide crude stocks.