Crude Pressure?

The world has adequate supplies of crude oil despite OPEC’s recent assessment that market for crude will be undersupplied by ~0.4 million barrels per day in 2018. U.S. crude production climbed in March to 10.47 million barrels per day, a monthly record, data from the Energy Information Administration shows and U.S. drillers continue to add rigs reaching the highest levels of activity since early in 2015. On paper at least, the world is still oversupplied and prices should be falling. However, geopolitical uncertainty and events are setting up for pressure on crude prices despite President Trump’s tweeting about OPEC and high prices.

Perhaps the most significant impact is the Trump administrations return to sanctions on Iran. According to the State Department, companies buying Iranian crude must cut all exports by November or themselves face sanctions. This news has already been conveyed to European countries and pressure will certainly be applied to China, India and Turkey in the coming months to comply. This could effectively remove 2m b/d from the market. Meanwhile, Russia and OPEC have started to ease restrictions on production and OPEC has agreed to raise production by an indeterminate amount.

However, there are other factors at work including the rapidly declining production from Venezuela which has seen around 1m b/d effectively removed from the market while Libya recently declared force majeure suspending exports from two key ports and removing 850,000b/d from the market. At the same time, disruption at Syncrude Canada’s oil sands facility removed another 360,000b/d through July. While OPEC has some ability to up its production, as we look into later 2018 and 2019, it does look as if the supply/demand balance will be tighter and prices significantly more volatile.

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On the one side, we see supply disruptions mostly as a result of geopolitical factors impacting supply and on the other, there is yet the possibility that these same geopolitical issues may dampen demand as trade tariffs and trade wars will have a negative impact on growth. Whatever occurs, it now seems certain that there will be increasing tightness in supply/demand leaving oil prices even more vulnerable to unexpected outages and political events.

Despite President Trump’s insistence that OPEC reduce prices, OPEC’s control over price has diminished and it now seems as if it will be his own actions and policies that will direct the future price of crude?

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