Where are oil prices heading and what is controlling them?
We have oil disruption in Venezuela.
We have oil sanctions on Iran, leading to near zero (0) exports by November 4, 2018.
We have trade wars between the US and China with a big impact on energy exports.
We have US shale and rising production up to 10.5 million barrels per day (bpd).
We have a strengthening US dollar putting consuming countries under demand burden.
We don’t have production cuts anymore.
We have crude oil prices posting their longest losing streak in three years, with 6 straight weeks of declines leading to WTI at $67.47 and Brent at $72.81 today.
So what have we got on the oil production and prices journey ahead till end 2018?
Forbes said Saudi Arabia is back in control of the oil market again saying it’s the “swing” oil producer, ready to raise production to “stabilize” oil prices, quoting reports that were circulated by both Reuters and the Saudi Gazette over last weekend.
The definition of swing producer includes the capacity to control pricing of a commodity through increased production and the lowest incremental cost of production.
“The Kingdom’s return to its old role didn’t happen by accident. It has been part of a plan that dates back to September 2016, when rising oil output by American frackers began crashing oil prices,” said Forbes.
For most of 2016, the frackers in America retooled their portfolios and improved practices, cutting average well costs down to where they were economic with $40-$50 oil.
Saudi has recently played the role of emergency producer, to plug in gaps opened up by production shortfalls and to stabilize oil prices.
CNBC said Saudis face the challenge of managing the oil market so that prices do not rise high enough to hurt demand or upset allies like Trump, but do not fall so low that they put stress on the kingdom’s finances.
Saudi Arabia is trying to keep oil prices around $80 a barrel, analysts tell CNBC, and a drop in Saudi production tends to boost prices.
The kingdom hiked output by more than 400,000 bpd in June, said CNBC.
The entire OPEC group saw its output jump by nearly 41,000 bpd in July to 32.3 million bpd, according to independent figures cited by the group in its monthly report.
Kuwait and the United Arab Emirates, two of the only OPEC nations with spare capacity, contributed the biggest and third-largest increases, respectively, said CNBC.
OPEC expect non-OPEC members to pump 59.6 million bpd in 2018, up 73,000 bpd from its last estimate.
“In 2019, it sees non-OPEC producers pumping nearly 61.8 million bpd, or 106,000 bpd more than previously expected. Both adjustments were due to OPEC’s view that China will pump more than previously anticipated in both years,” said CNBC.
Oil price projections
Tom Kloza, co-founder of the Oil Price Information Service, told CNBC’s “Futures Now” this week that oil prices have been so volatile that a slump to $50, or even a spike above $100 could not be completely ruled out.
WTI hit a peak above $74 in early July, a 25% increase from its February below $60 prices, while Brent hit $80 in July from a low of $65 in Feb.
Kloza says tighter inventories at Cushing, Oklahoma, a major crude hub, could push the price of WTI back above $70 in coming weeks, a level it has not seen this month.
“They’re about 21 million barrels compared to numbers that are closer to 55 or 65 million barrels in the last couple of years, so you could have a squeeze between now and when the September WTI contract expires.”
Under pressure over rising gas prices, Trump in July called on OPEC to bring down oil prices.
He is reportedly also considering the sale of some of the U.S.’s emergency oil supplies to deflate crude prices, according to a report in Reuters.
Taking over 1 million barrels of Iranian oil out of global circulation could push oil prices higher again.
Iran is OPEC’s third-largest oil producer behind Saudi Arabia and Iraq and currently pumps around 3.65 million barrels per day, according to Reuters data.
The last time Iran was sanctioned, about half its current oil exports of some 2.4 million barrels were removed from the market.
Prominent industry site OilPrice.com said that on the demand side, there is a slowdown.
In the first quarter of 2018, demand grew at a staggering 1.8 million bpd rate, but that has slowed dramatically to just 1 million bpd in Q2 and Q3.
“Higher oil prices – Brent was up roughly 45% – have started to impact consumption,” said the site.
“Putting it all together, we have a “cooling down” period in which the urgency over supply disruptions and the pressure from soaring demand have both calmed a bit.”
OilPrice.com added that on the bearish side, the escalating trade war could “lead to slower economic growth, and in turn lower oil demand” despite the IEA saying demand will return to stronger levels in 2019, revising up its forecast to 1.5 million bpd, up from 1.4 million bpd.
“As oil sanctions against Iran take effect, perhaps in combination with production problems elsewhere, maintaining global supply might be very challenging and would come at the expense of maintaining an adequate spare capacity cushion,” the IEA said.
Typically, crude futures trade inversely to the greenback. A stronger dollar makes oil more expensive to much of the world, so oil prices tend to fall as the dollar rises.
The prospect of continued strength in the U.S. dollar over the coming months should constitute an even greater concern to bullish oil traders than an escalating trade war between the world’s two largest economies, an analyst told CNBC on Monday.
The figure below, an index of the value of the dollar against a basket of foreign currencies, shows the dollar beginning its most recent appreciation around when the first salvos of the trade war hit.
the U.S. dollar climbed to a 13-month high against a basket of six major currencies on Monday, amid renewed financial turmoil in Turkey. The greenback edged around 0.1 percent higher during early afternoon deals, trading at 96.460 against major peers.
Investors are currently eyeing more bearish indicators, such as broad greenback strength and a ramp-up in production by OPEC and its allied partners.