Oil prices almost as turbulent as this year’s summer holiday weather

Oil prices rose by around USD 2/barrel late this morning on expectations that the ECB would cut rates at today’s meeting and on the Norwegian Oil Industry Association’s (OLF) notification of a lockout on the Norwegian shelf.

The lockout comprises 6,515 workers covered by the OLF agreement who will be locked out from their workplaces offshore with effect from Tuesday 10 July at 00.00. A lockout will imply a shutdown of all oil production on the Norwegian shelf of around 2m b/d.

A production shutdown on the Norwegian shelf will hit the European market hard. Norway is the world’s seventh-largest oil exporter and supplies around 1.5m b/d to Europe (largely equivalent to the loss of Libyan oil production/exports during the Arab Spring last year). The conflict, which has been going on for over a week, has already cut oil production in the North Sea by around 250k barrels.

20% of the Norwegian oil production goes to domestic market. If the lockout lasts for long something we don’t believe, it can tightened the market significantly and push up prices on oil products such as petrol and diesel or in a worst case scenario it may lead to scarcity of oil products like petrol and diesel.

The strike and a potential lockout come at a time when the European oil market is highly vulnerable to further supply disruptions, after the US further tightened its sanctions against Iran and the EU introduced a boycott against imports of Iranian oil from 1 July.

As expected, the ECB today decided to cut both its benchmark rate and its deposit rate by 25 bp to 0.75% and 0%, respectively. Last week’s EU summit was a positive surprise for the market and helped to boost risk appetite, pushing up oil prices by some 12% the past week. Even so, the growth outlook has been bleak for one of the world’s largest oil-consuming regions and today’s rate cut was sanctioned as risks to the economic outlook are still “on the downside”. According to Draghi, the persistent high uncertainty weighs on market confidence and helped to drag down risk sentiment and thus oil prices by USD 1.5/barrel after the monetary policy meeting. In addition, the People’s Bank of China surprised by cutting its 1-year lending rate by 0.31% point and its 1-year deposit rate by 0.25% point. Longer term, the rate cuts will help to stimulate economic growth and thus oil demand.

Today’s ADP employment report, which is an appetiser ahead of tomorrow’s important non-farm payrolls/employment report from the US, surprised on the upside. We still expect the June report to show a soft 60k increase and if we are right this should add to the continuing concerns about the strength of the US economy. In the short term we still expect to see some more soft data from the world’s largest oil consumer before we see a turnaround for the better later this summer.

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