Global equity markets rallied on Tuesday as concerns over Brexit subdued a bit, and investors plunged back into risk assets for bargains (or perceived bargains).
Oil markets might continue the recent ascent if the Norway strike materializes in production disruptions.
According to a recent report by the Wall Street Journal, nearly 7,500 oil and gas workers could go on strike starting Saturday if a new wage deal isn't agreed upon by July 1 st.
Implications of a strike are meaningful to global oil supplies as Norway produced 1.96 million b/d in May. In the case of any disruption that arises from the strike, it would likely be temporary.
Let's assume that the strike results in a week of Norway production being offline. That's 13.72 million bbls lost. Crude export from Norway will likely remain unchanged as exports can be supplied through inventory, but stock would draw 13.72 million bbls. Obviously, the longer the strike lasts, the greater the impact on exports and storage. There's currently no real gauge as to how long the strike could potentially last, but with global outages around the world accelerating, traders aren't taking the risk.
In addition, energy consulting firms believe that the export figures out of Venezuela imply significantly lower production figures than what was reported. We have highlighted this many times in our oil markets daily, and alluded to Venezuela's production being closer to 1.9 million b/d than the 2.37 million b/d reported.
In any event, any production disruption that arises from the strike goes to help balance the current oversupply. We think the oil market is far more balanced now thanks to the global supply decreases and outages from Canada, Venezuela, Angola, China, US, Nigeria, and other non-OPEC countries.
Storage overhang will remain a concern going forward. Traders that remain skeptical of the recent rebound will continue to point to storage as the number one concern. Refined product storage overhang will also serve as a headwind for crude prices as refinery margins compress leading to potentially lower throughputs. Demand remains another black box as the aftershock of Brexit could potentially impact crude demand, but we remain skeptical of that possibility. Nonetheless, it's important to understand the bearish argument when assessing the current outlook.
Oil markets are forward looking, so prices will tend to move in advance of weekly inventory reports. Fundamentals eventually have to validate the price increase, so we should begin to see larger inventory draws over the next several weeks. Imports should start to decline as we reported that Saudi inventory has been in a consistent decline, and increased summer cooling demand could deter export volumes. Import drops of 1 million b/d has a material impact on weekly storage figures, so be sure to keep an eye on that.
Overall, we don't think the Norway strike will lead to a prolonged outage in production. Any temporary disruptions will help alleviate some of the over storage, and fundamentals continue to point in the right direction. It's now simply a waiting game.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.