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Posted: 04 Jul, 2018

Oil Prices Surge After Global Supply Buffer Shrinks and Stockpile Drops

Members of Organization of the Petroleum Exporting Countries (OPEC) met two weeks and heeded consumers’ calls increase their overall oil production. This fleeting reassurance led by Saudi Arabia has swept away as the United States proposed stricter sanctions on Iran that make the oil market more nervous by cutting into the dwindling emergency crude supply and raising prices.

OPEC and its allies can deploy about 3.4 million barrels per day (bpd) in emergencies according to the International Energy Association. With the agreed 1 million bpd increase, OPEC would cut into its idle capacity leaving the world with an emergency buffer equivalent to just 2.6 percent of global supply.

This will limit OPEC’s ability to react to further disruptions - and there are a few existing ones. As Venezuela’s economic crisis worsens, it is likely to slump even further. A few weeks ago, Libya unexpectedly lost 400,000 bpd production due to one militia attacking two oil terminals, prompting another armed group to seize control of a swathe of the country’s industry.

Amrita Sen, chief oil analyst at Energy Aspects Ltd, says, “It basically leaves us with no spare capacity, at a time when Iran isn’t the only issue. Venezuelan production’s falling, Angola, Libya, Nigeria --there are lots and lots of issues everywhere in the world.”

The supply increase agreed by OPEC is primarily intended to offset these production losses. However, the gap OPEC is trying to fill will grow again when U.S. sanctions on Iran take effect in November.

As part of its sanctions on Iran, the U.S. is pushing for its allies to stop buying Iranian crude which could take another 1.5 million barrels a day from the market, according to consultant Energy Aspects Ltd. Iranian president Rouhani stated that his country could block the Strait of Hormuz for all Arab shipping traffic, about 17 million bpd pass through the strait daily, if the US fully implements its zero oil export sanction targets for Iran in the coming months.

The U.S. continues to increase its exports, diving into its stockpile thanks in part to the sanction cutting into Iran’s market share. The United States’ domestic crude stockpile declined by 9.89 million barrels last week, as refiners increased utilization rates to the highest since 2005 and refinery demand for all feedstocks jumped to a record, the Energy Information Administration said.

Demand for U.S. oil will persist overseas as sanctions cut into Iran’s market share, Venezuelan production continues to collapse, and OPEC, specifically Saudi Arabia, stretches their output capacity,Nick Holmes, an analyst at Tortoise in Leawood Kansas said. “Spare capacity, globally, is pretty thin and that bodes well for prices.”

West Texas Intermediate (WTI) crude for August delivery climbed $2.23 to settle at $72.76 a barrel on the New York Mercantile Exchange. As WTI hits 2014 highs, oil options traders bet on a further near-term rise.

Sources:

  1. Nicholson, M., and Amanda Cooper (2018, July 4) Brent crude firms on drop in U.S. oil inventories, Iran threat. Retrieved from https://uk.reuters.com/article/uk-global-oil/oil-inches-up-on-tighter-us-supply-looming-iran-sanctions-idUKKBN1JU02Q
  2. Smith, G. (2018, June 27). OPEC Supply Buffer Shrinks as It Heeds Call to Pump More Oil. Retrieved from https://www.bloomberg.com/news/articles/2018-06-26/opec-supply-buffer-shrinks-as-it-answers-calls-to-pump-more-oil
  3. Summers, J. (2018, June 27). Oil Surges to Highest Since 2014 After `Massive' Stockpile Drop. Retrieved from https://www.bloomberg.com/news/articles/2018-06-27/oil-holds-gains-as-u-s-presses-allies-to-end-iranian-imports