Oil supply crunch coupled with sanctions = $Price explosion
December Brent rose $1.49, or 1.8%, to $86.29 a barrel on the ICE Futures Europe exchange, currently trading at $85.9, up 1.48% in 24 hrs. November West Texas Intermediate crude, the U.S. benchmark contract, added $1.18, or 1.6%, to settle at $76.41 a barrel on the New York Mercantile Exchange, currently trading at $76, up 1.5% in 24 hrs.
What’s going on?
As the November 4 US deadline for all countries to stop buying oil from Iran nears, or be sanctioned themselves, oil prices have been spiking on fears of a supply crunch. More Iranian oil is going offline with reports that China who was expected to resist U.S. pressure regarding Iranian oil purchases, also cutting down.
“It shows that the market is not convinced about the ability of the producers’ group to replace Iranian barrels,” said Tamas Varga, an analyst at PVM Oil Associates Ltd., according to Bloomberg.
Iranian oil exports are plunging and fell to their lowest level since at least February 2016 last month at 1.72 million barrels per day according to OilPrice.com.
That was a decline of around 250,000 bpd from August, and down roughly 1 million bpd since a peak in April, according to Bloomberg.
Kuwait’s oil exports to the U.S. fell to zero in September, a result of rising production in the U.S. and a tight market in Asia as Iranian supply disappears, according to OilPrice.com.
Saudi had declared it would ramp up oil production in September and again in October, despite the non-decision from OPEC+ on an official increase in output, however, a report from Reuters suggests the kingdom only added a modest 50,000 bpd in September, which was outweighed by the 100,000 bpd loss from Iran.
Saudi may need to raise production to nearly 11 million barrels per day to compensate for market needs.
In fact, all of OPEC produced 32.85 million mbd in September, an increase of only 90,000 bpd on net compared to a month earlier.
“As a result, the main focus for the oil market over the next few weeks will be on the tension between falling supplies from Iran and Venezuela versus the increase in supply from Saudi Arabia,” said OilPrice.com. Saudi Arabia’s 50,000-bpd increase in September
According to Business Insider, the price of oil will ‘certainly’ go above $90 and likely spike above $100 in the coming months as sanctions on Iran tighten an already stretched global oil supply.
The market in 2019 would always have been tight with producers struggling to meet global demand, but Iran has brought the inflated oil prices forward to this year, said.
“We’re nowhere near the end of this rally,” Richard Mallinson, energy and geopolitics expert, and co-founder of Energy Aspects told Business Insider.
” Venezuela played a really important role in accelerating the shift in the market ever since – really 2016, when its production started to fall,” Mallinson said.
US sanctions combined with the poor oil sector governance have seen Venezuela’s production drop by over a million barrels per day or 1% of global demand.
Is OPEC manipulating prices?
According to OilPrice.com, U.S. Congress is looking at the “NOPEC Act”, saying a U.S. Senate subcommittee held a hearing on aimed at revoking the sovereign immunity that has protected OPEC countries from lawsuits over manipulating the oil market.
“If passed, the U.S. could sue OPEC members for collusion. The bill has been kicked around for years but past American administrations, from both parties, have opposed it for fear of damaging the U.S.-Saudi relationship. The difference now is that some analysts think that Donald Trump may actually support it,” said OilPrice.com.
CNBC reported that Qatar’s energy minister has defended OPEC’s oil market strategy, saying a deal between the oil-producing group and non-OPEC producers is not aimed at manipulating oil prices.
“OPEC is not trying to manipulate the price, it’s trying to bring the market to balance,” Qatar’s Minister of Energy and Industry Mohammed Bin Saleh Al-Sada, told CNBC on Wednesday.
The oil prices to ‘drop’ version
According to Barclays, soft demand will push prices down.
The investment bank says that “prices are ripe for a correction,” citing softening demand and higher supply.
OilPrice.com reported Barclays saying that the tight market right now could force the U.S. government to either issue exemptions to countries importing Iranian oil or to release oil from the strategic petroleum reserve.
“Barclays sees Brent falling to an average of $77 in Q4 2018 before plunging further to an average of $70 by Q3 of 2019.”
Also, Reuters recently reported that OPEC’s latest report forecast that its non-OPEC rivals led by the US would increase output by 2.4 million bpd in 2019 while global oil demand should grow by just 1.5 million bpd, creating a large surplus of crude next year.
“The latest OPEC report suggests that the slowdown in demand due to seasonal factors, combined with rising non-OPEC production, could translate into a decline in the “call on OPEC” by 600,000 bpd in the first half of 2019 relative to August levels,” says OilPrice.com.
On a related note, Russian oil production output hits post-Soviet record at 11.35 million bpd, rising by 150,000 bpd from a month earlier.