How are oil prices inching up despite a supply glut?
Crude oil prices are beginning to find upward momentum climbing on the back of slower-than-expected U.S. production, OPEC production cuts, a planned reduction in Saudi exports, as well as sanctions on Venezuela and Iran.
International Brent crude oil futures rose to $66.93 on Wednesday, up 0.4 percent or 26 cents, from the previous close, Reuters reported. Brent touched a new 2019 high of $67.39 per barrel on Monday.
These figures indicate that although oil prices are still much lower than the $86 per barrel Brent highs seen in 2018, a few bullish factors are nudging prices higher.
Oil production in the U.S.
The U.S. Energy Information Administration (EIA) in its latest Short-Term Energy Outlook (STEO) lowered U.S. crude oil production expectations down 0.9 percent to 12.3 million barrels per day (bpd) in 2019. While production levels are still hovering near all-time highs, the downward revision of estimates shows that the growth rate will be slower than expected a month ago. This easing in production, though seemingly marginal, has raised expectations for those hoping for oil prices to pick up.
OPEC+ production cuts
The 14-member Organization of the Petroleum Exporting Countries (OPEC) announced in its January 2019 monthly report that it had reduced production to 30.8 million bpd, from 31.6 million bpd in December. This showed the body implementing its aim of reducing a combined 812,000 bpd to compensate for the oversupply in the oil market, which was pulling oil prices down.
Saudi Arabia, UAE and Kuwait are making the biggest cuts in production to balance supply-demand in the oil market. These production cuts are expected to stay in place until OPEC meets with its partnering alliance of 10 nonmember nations (generally referred to as OPEC+) in April 2019.
Saudi export cuts
A Saudi official confirmed the kingdom’s plan to reduce oil exports in April, a Reuters report said. The official made it clear that Saudi Arabia intends to cut crude exports to less than 7 million bpd, while maintaining an output below its 10 million bpd cap. This corroborates viewpoints of analysts and experts who gave a thumbs-up to possible Saudi export cuts. This reduction by the world’s largest oil exporter further decreases the supply glut, helping crude oil prices inch up.
Venezuela and Iran sanctions
Sanctions placed by the U.S. administration on Venezuela and Iran have also had their impact on oil production and prices. The EIA in its latest forecast stated that it was watching the effects of these sanctions on crude oil prices. When the sanctions were imposed at the end of January, Venezuela’s production of oil was already seeing a decline of 50,000 bpd on average each month. After the imposition of these sanctions, Venezuela’s crude oil production has dipped by 100,000 barrels per day between January and February of this year. To add to this, oil production and exports in Venezuela have been further disrupted by power cuts, supply problems, as well as political strife.
While putting a complete stop to Iran’s oil production and export seems unlikely, the EIA believes that sanctions are likely to bring Iran oil exports to a mere 1 million bpd. Such sanctions placed on Iran would have seen oil prices soaring in years past. However, with U.S. production still at an all-time high and adding to the supply glut, all of these triggers have only caused a marginal increase in oil prices.