Oil Prices Down as U.S. Stockpiles Grow
Oil prices slightly dipped on Wednesday October 17 due to stockpile growth in the United States (U.S.), despite production levels falling last week. As of 12:10PM on Wednesday October 17, WTI stood at $70.01 and Brent at $79.93. According the U.S. Energy Information Association (EIA), crude stockpiles grew by approximately 6.5 million barrels last week driving prices down. On Tuesday, the American Petroleum Institute reported an expected reduction of 2.13 million barrels of U.S. crude oil inventories last week. However, analysts surveyed by S&P Global Platts had forecast a rise of 1.88 million barrels, and the market saw a slight uptick in prices late Tuesday. Additionally, U.S. crude production fell by approximately 300,000 barrels per day (b/d)—from 11.2 million b/d from the previous week to 10.9 million b/d.
The EIA’s Short-Term Energy Outlook, published on October 10, estimates that U.S. crude oil production averaged 11.1 million b/d in September. EIA predicts that U.S. crude production will average 10.7 million b/d in 2018, up from 9.4 million b/d in 2017, and will average 11.8 million b/d in 2019.
U.S. Secretary of the Interior Ryan Zinke recently said that U.S. oil production could reach 14 million b/d by 2020. “There are some hurdles. We’ve got to get [Federal Energy Regulatory Commission] involved. We’ve got to get the infrastructure, but the production side of it is well within its capability of reaching fourteen.” Secretary Zinke’s confidence in reaching a record-breaking production level of 14 million b/d suggests that the U.S. is committed to remaining the largest oil producer in the world.
Tensions between the U.S. and Saudi Arabia, over the death of Saudi journalist Jamal Khashoggi, have contributed to concern and uncertainty of a possible spike in oil prices and global production. Saudi Arabia could curb its oil production if the U.S. imposed sanctions, causing prices to jump well above $80 per barrel. Pressure placed on Saudi Arabia by President Trump over Khashoggi could have serious implications in terms of global market stability. Saudi Arabia could dramatically cut production in retaliation, causing oil prices to skyrocket as producers struggle to supply the global market.
Furthermore, U.S. sanctions on Iranian oil exports will take effect November 4. Once sanctions are implemented, Iranian oil sales will fall by 1 million b/d or more, putting considerable upward pressure on oil prices.
Looming sanctions have led European leaders to devise a plan to circumvent U.S. sanctions and avoid secondary sanctions. The deal announced in September is an oil-for-goods program in which Iran would sell its oil to Russia. Russia would refine the oil and sell it to European countries. In exchange, Europe would transfer goods and services to Iran, thereby bypassing any U.S. restrictions on trade with Iran. If effectively implemented, this could alleviate stress on the global oil supply.
From a geopolitical standpoint, it seems unlikely for Saudi Arabia to reduce its oil output. President Trump has previously called out the Organization of the Petroleum Exporting Countries (OPEC) for high oil prices, specifically Saudi Arabia. Any dramatic increase in prices by Saudi Arabia would strain U.S.-Saudi relations. Isolating itself from the U.S. is not in Saudi Arabia’s interest, given their shared stance regarding Iran’s influence in the region. From an economic standpoint, higher oil prices would only give other producers incentive to raise their output and take market shares from Saudi Arabia.
As OPEC’s largest producer, Saudi Arabia is responsible for 10 percent of the world’s crude demand. If their production is cut, along with other major producers such as Iran and Venezuela off the market, there is no way to replace Saudi Arabia’s supply.