Oil Trades Near $68 Before US Stockpile Data, Iran Decision

Brent Crude

Brent Crude

The current sideways trade in crude oil is being fueled by President Donald Trump's threat to reimpose sanctions if adjustments are not made to Iran's nuclear program agreement and the surge in US shale supply.

The production of Angola has also declined and the country produces more than 260,000 barrels less than the OPEC target. Over the past 12 months, Exxon stock has traded down about 6.3%. In the third and fourth quarters, US crude exports routinely bounced around between 1 and 2 Mbd, after hovering just below 1 Mbd earlier in the year. The differential between Brent and WTI has steadily widened since early March when the gap stood at roughly $3/b.

Oil prices strengthened slightly ahead of the settlement Wednesday as the Federal Reserve held interest rates steady and expressed confidence that a recent rise in inflation would be sustained. New refinery capacity and strategic inventory stockpiling, combined with declining domestic production, were the major factors contributing to its recent increase in imports.

What that's done is "draw down oil inventories well below the five-year historical levels, and these were the levels that OPEC was targeting to bring the oil market more into balance". The port still needs to be expanded to handle VLCCs on a regular basis, so large-scale exports are not set to begin just yet.

"Infrastructure has to be built in order to transfer oil out and in order for production to grow". A rise in oil prices has naturally brought about a rise in U.S. shale production; total United States production, dominated by shale, is forecast to increase almost 15 percent this year by the country's Energy Information Administration. First, the aforementioned pipeline bottlenecks in the Permian could start to slow the movement of oil to the Gulf Coast. State-run oil company PDVSA, which once operated in the same league as the likes of Saudi Aramco, is a mere shadow of its former self, with years of mismanagement and underinvestment leaving it in tatters. On the one hand, the bottleneck could depress WTI if oil is trapped within the USA, which would augment the business case for exports. "Saudi has talked about a price range of at least US$80 per barrel, so look for prices to still be fairly constructive".

Another limiting factor for higher US exports is that an increase in exports tightens the WTI discount.

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But some traders reiterated that Iranian crude remains very price competitive compared with other regional sour crudes.

An increase in US crude exports is viewed as a victory for policymakers in Washington, DC who have long anxious that net import dependence undermines energy security. However, the rest of the USA economy is still vulnerable to swings in the global market.

Trump attacked OPEC last month for higher prices, even though his own threats to the Iran deal have also played a role.

Oil spiked recently due to geopolitical tensions and OPEC cuts, says portfolio manager Brian See. The higher prices rise and the longer they are expected to stay high the bigger the eventual response from oil consumers.

These dynamics also point to the advantage that US oil exports offer for not only China but the entire Asia-Pacific region.

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