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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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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.
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.
