June 2018 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil edged lower in June, falling by $2.10 (-3.0%), to $67.87 per barrel. The retreat occurred within an environment of a much stronger U.S. dollar, the lagged impacts of a 632,000 barrel-per-day (BPD) drop in the amount of oil supplied/demanded during April (to 19.9 million BPD), and a gradual decrease in accumulated oil stocks (monthly average: 426 million barrels). 

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From the 5 July 2018 issue of Peak Oil Review:

In the two weeks since the OPEC+ coalition decided to increase oil production by an undefined amount, oil prices have risen steadily on fears that there will be oil shortages and higher prices in the coming months.  New York oil futures closed above $74 a barrel last week and London closed above $79 on Friday. Driving the markets higher are disruptions to oil production in Venezuela, Libya, Canada, Nigeria, and the US efforts to force Iran to zero exports this fall. The situation is not helped by the slowdown in the increase in US shale oil production due largely to bottlenecks in moving Permian shale oil to markets. There is no sign of a letup in the global demand for oil which is expected to increase by 1.5 million b/d this year.

Taken together, it seems unlikely that Russia and the Gulf Arab states, which are the only countries with significant capacity to increase oil production, will be able to offset the increase in demand and supply disruptions elsewhere. Some observers are even talking about a return to $100 oil next year. The United States aims to reduce Tehran’s oil revenue to zero in an effort to force the Iranian leadership to change its behavior; Washington maintains there is enough spare global oil capacity to make up for lower supply from Iran.

Saudi Arabia is moving to increase production to a record high 11 b/d in July, according to Reuters. If this increase can be realized, it would be an incredibly rapid jump in production by more than 1 million b/d from May levels.  President Trump said in a tweet on Saturday that the Saudis agreed to boost oil production by 2 million b/d. This assertion came as news to the Saudis. The White House quickly walked back the President’s tweet say that “In response to the President’s assessment of a deficit in the oil market, King Salman affirmed that the Kingdom maintains a two million b/d spare capacity, which it will prudently use if and when necessary to ensure market balance and stability.”

Historically, the Saudis have been reluctant to increase oil production to their maximum ability for fear there would be too little a supply buffer should there be more unplanned supply outages. Other gulf Arab countries, as well as Russia, have extra output capacity, but these capacities are far smaller than that of the Saudis.

According to Goldman Sachs an outage at Syncrude Canada’s oil-sands facility may lead to a 360,000 b/d shortage for July and shrink stockpiles at the US storage hub at Cushing, Oklahoma.

The OPEC Production Cut: Oil prices jumped 5 percent the Friday before last after the OPEC+ group announced a vague decision to maintain its collective oil production target while lifting country-specific limits. The result was viewed as only a modest increase, which could lead to tighter supplies. Saudi officials later sought to clarify the decision by noting that the move would lead to an increase of 1 million b/d. That caused prices to fall back a bit on Monday.

OPEC oil output rose last month as Saudi Arabia pumped at a near-record rate, a Reuters survey found on Monday.  The cartel pumped 32.32 million b/d in June, up 320,000 b/d from May.

Saudi Arabia has invited Russia to become an observer member of OPEC.  Russia and Saudi Arabia have increased ties in recent years out of a mutual desire to increase oil prices that underpin their economies. The OPEC /non-OPEC coalition now controls almost half of global crude production.

US Shale Oil Production: US crude production fell marginally by 2,000 b/d to 10.467 million in April from the highest on record in March, the EIA said in a monthly report last Friday.  Baker Hughes reported another dip in the number of active oil and gas rigs in the US. Oil rigs decreased by four last week and the number of gas rigs by one. The pipeline constraints on Permian shale oil production are finally starting to bite, threatening to derail the boom that has been underway for the last few years.  According to Bloomberg Permian drillers are “quitting new wells at a record pace.” The region’s pipeline network is nearly full, forcing steep and ever-widening discounts for the price of oil coming from West Texas. The number of drilled but uncompleted wells remains very high.

Oil production in the Permian is rising by 800,000 b/d annually, with current production at 3.3 million b/d. The total pipeline capacity is 3.6 million b/d, so producers—especially those that don’t have firm deals for pipeline transportation—will be hitting the limit of takeaway capacity in the next three to four months. Significant increases in pipeline capacity are not expected for another 18 months, suggesting that Permian production will plateau at 3.3 million b/d for the next year or so. While production at other shale oil basins continues to grow, nobody is expecting a substantial increase in oil production from these aging shale oil deposits.

Selected highlights from the 29 June 2018 issue of Oil & Energy Insider include:

U.S. dials back hard line on Iran imports. Earlier this week, a State Department official laid out what sounded like a “zero tolerance” policy for nations cutting oil imports from Iran. The official said that countries need to “zero” out their imports by November, and that it would be unlikely anyone would receive a waiver. The statement led to a spike in oil prices because the market had to dramatically revise up the assumed outage from Iran. On Thursday, a State Department official appeared to soften the line. “Our focus is to work with those countries importing Iranian crude oil to get as many of them as possible down to zero by Nov. 4,” the official said Thursday. “We are prepared to work with countries that are reducing their imports on a case-by-case basis. We are serious about our efforts to pressure Iran to change its threatening behavior.” The walking back of the “zero” imports mantra suggests the U.S. fears the fallout of pushing oil prices too high.

India tells refiners to prepare for “zero” imports from Iran. India’s oil minister advised its refiners to prepare for a “drastic reduction or zero” oil imports from Iran by November, due to the threat of U.S. sanctions. India, as a close neighbor and significant purchaser of oil from Iran, appears willing to wind down oil imports from Iran even as it does not recognize the sanctions as legitimate. India’s actions are an indication that Washington could wield far-reaching influence over Iran’s oil exports, even though much of the world is not lined up with the U.S. position.

Saudi Arabia to ramp up production to 10.8-11.0 mb/d. Saudi Arabia reportedly will ramp up oil production to 10.8 mb/d in July, perhaps as high as 11.0 mb/d. The plans come as a series of outages around the world have pushed oil prices and left the market in a deficit. The increase in production, however, could eliminate as much as 40 percent of Saudi Arabia’s spare capacity, taking available capacity down to around 1.5 mb/d, a rather small buffer. “It basically leaves us with no spare capacity, at a time when Iran isn’t the only issue,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said in a Bloomberg television interview. “Venezuelan production’s falling, Angola, Libya, Nigeria --there are lots and lots of issues everywhere in the world.”

Oil jumps on massive crude draw. The U.S. saw crude inventories plunge by 9.9 million barrels last week, another sign of a tightening oil market. Oil futures jumped more than 3 percent on the news.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.