Crude oil shrugs off rising U.S. production as Brent nears $80/barrel

May 17 11:59 2018

With Japan and South Korea already indicating that they will aim to attain a waiver from the U.S. in order to continue buying Iranian crude, the impact of Trump’s actions will rest on how far he goes in comparison with Obama’s previous sanctions.

Oil prices kept their footing on positive grounds on Tuesday, as markets tightened on the Organization of the Petroleum Exporting Countries’ (OPEC) continuous effort to trim output and the upcoming United States sanctions against Iran.

“For the last three, four, five months we’ve seen high turnarounds globally”, a USA crude trader said, referencing maintenance works.

OPEC’s original goal in the production cut pact was to bring oil inventories in developed economies down to their five-year average, and according to the cartel itself, as of March those stocks were just 9 million barrels over that level, and are probably below it by now.

Yet, in a worst-case scenario for tightening oil markets but a boon for both OPEC and non-OPEC producers alike looking to capitalize on higher oil prices, commodities data provider S&P Global Platts cites analysts that predict 1 million bpd will be removed from the market due to re-imposed Iranian sanctions. Capital expenditures in non-OPEC grew by only two percent in 2017, and are still 42 percent below 2014. “The price is pretty good and we’re not seeing any growth outside the USA”, said the investor.

Benchmark oil contract Brent North Sea surged above $80 a barrel on Thursday, hitting the highest level since late 2014 and extending a recent run higher fuelled by tight supply concerns. Investors are speculating the amount of crude that will be wiped out and it is estimated that approximately 2,00,000-5,00,000 bpd are now at risk.

However, sometimes slogans can become an embarrassment as Drill, Baby, Drill turned to Spill, Baby, Spill following the 2010 Deepwater Horizon oil spill at a British Petroleum offshore drilling rig in the Gulf of Mexico. These are expected to arrive in July, they said. The quick embrace of Trump’s announcement reflects a sense of vindication by Saudi Arabia and the UAE, which have pushed President Trump to take seriously Tehran’s ballistic missile programme and purported support for militant groups. It’s important to remember how and why the market got to its current situation.

Investors have piled millions of dollars in record wagers in the options market, betting on a further rally on the back of rising geopolitical tensions, particularly in Iran, Saudi Arabia and Venezuela, and the global decline in supply. Other OPEC officials, meanwhile, have expressed complacency. Better-than-expected data from Asia, including India, and Latin America also prompted OPEC to revise its oil-demand growth in non-OECD nations estimates higher. The performance of non-OPEC supply in 2018 would depend on many factors, it said.

From a glut to a crunch

Crude oil shrugs off rising U.S. production as Brent nears $80/barrel
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