Barclays: Possibility of an increased crude oil supply gap in Q3

In the shorter term, oil fundamentals remain in tightening mode, with sharp reductions in the prospects for non-OPEC supply and resilient global demand indicating the likelihood of an increased supply gap in Q3 in a world with a declining inventory cover and spare capacity, said Barclays in a report. 
“Absent a severe recession, oil demand dynamics look set to outpace the additions to supply in our view, keeping the pressure on prices largely intact.”—Barclays said.
 
Further, the backdrop of the oil market remains extremely politically charged, with events in the Middle East remaining a constant threat to oil supplies. In the past 10 days, four bombs were planted inside Iraq's second largest refinery, and while little damage was done, it could have taken as much as a 75% of the refinery offline, which has a capacity of 210 thousand b/d. Indeed, al-Qaeda has also been seen to target the Iraqi oil sector and, as we have warned previously, Iraq remains a key potential geopolitical risk to the oil market. 

Following the sharp moves lower on Wednesday, oil prices were fairly stable and rangebound Thursday, staying around a $2 range, as July WTI closed up 14 cents at $94.95/bbl and August Brent closed up $1 to settle at $114.02/bbl. The WTI Brent spread continues to draw the markets attention, with the weakness in WTI caused by expectations of a domestic glut forming in the US Midwest and Canadian volumes finding their way to Cushing, while the tightness in the North Sea market has further accentuated the strength in Brent. 

The scale of the spread is unjustifiable, in our view, but the underlying drivers of the dislocation look set to become entrenched. Further, besides the infrastructure issue in the US Midwest, WTI has increasingly become a tool for expressing views on the US economy, in our view, creating a further layer of dislocation with the global oil market.
Yet, outside the benchmark intricacies and sovereign debt concerns and general macroeconomic unease, strong oil market fundamentals were further underlined with several data releases and reports this week. 

Notably, non-OECD oil demand continues to remain on a strong growth path while the trajectory taken by OECD demand has remained far more benign than in 2008. Indeed, the same sentiment was shared in the IEA's medium-term oil market report, where the agency sees higher and stronger global oil demand into the middle of the decade, even in an expected environment of higher prices.
Source: Commodity Online