Oil price slips — supply dynamics are realigned
- Oil prices slide on the back of a deteriorating outlook for the global economy
- Short-term crude inventories are reported lower than expected, but the longer-term levels of supply look set to increase
- OPEC and allied non-OPEC partners are scheduled to meet in Abu Dhabi next week to review their progress in stabilising the world oil markets
- Questions raised about how much influence the Middle East producers really have over oil price
- The Iranian oil tanker Adrian Darya 1(previously Grace 1) plays a cameo role as it goes ‘dark’ in an effort to deliver its cargo of 2.1 million barrels to Syria
In terms of total supply, it’s a drop in the ocean, but the 2.1 million barrels of oil being transported by the notorious oil tanker Adrian Darya 1 (previously named Grace 1) may be heading to Syria after the Gibraltar authorities released the vessel on 15thAugust.
The tanker was seized in July on suspicion that it was transporting the oil to Syria in breach of EU sanctions. After giving assurances that it would not sail on to any destination, which would contravene EU law, the Adrian Darya 1was released. It has since sailed east, and at 16:00 UTC on 2ndSeptember, while positioned 55 miles off the Syrian coastal town of Tartus, it turned off its AIS tracking signal and went ‘dark’.
The US was so keen to prevent the tanker from reaching Syria that the US State Department offered millions of dollars to the captain of the tanker should he navigate a course to a location where the US could seize it. A spokeswoman for the State Department confirmed to the press:
“We have conducted extensive outreach to several ship captains as well as shipping companies.”
The game of cat and mouse involving the Adrian Darya1and maritime authorities is not dissimilar to the internal workings of the OPEC group. The Organization of the Petroleum Exporting Countries is a loose coalition of oil producers that has for many years introduced policies to support the world oil price. This attempt at a unified approach is no small achievement considering that some in the group, such as Iran and Saudi Arabia, are sworn political enemies.
OPEC also has to contend with members facing the classic ‘prisoner’s dilemma’, where each party is aware that their own self-interest is best served by one course of action but that the group’s best interest is served by another. As the global economy stalls and prices drop, there is even more incentive for individual member countries to increase their own oil output levels and thereby maximise the sales and revenue accruing directly to them. Increased supply would, of course, (ceteris paribus) drive prices lower.
OPEC member countries produce about 40% of the world’s crude oil, and the group’s oil exports make up about 60% of petroleum traded globally. The major player within the group is Saudi Arabia, and Saudi adjustments to its oil output have a proven track record of being able to impact the price of oil in the world markets.
The below chart shows how projections of changes in Saudi Arabia crude oil production result in changes in WTI crude oil prices.
OPEC is due to meet in Abu Dhabi next week to review its progress. From OPEC’s point of view, the news is not particularly positive.
A price chart going back to 2002 shows the degree of volatility traditionally associated with oil prices.
Ticker: ‘USOil’ Monthly 2002-2019 MetaTrader MT4:
Through 2019, OPEC has struggled to shore up oil prices, which have traded in a relatively tight channel.
Ticker: ‘USOil’ Monthly 2018-2019 MetaTrader MT4:
RBC Capital Markets’ global head of commodity strategy Helima Croft raised the question of whether the OPEC approach to policymaking was doomed given the changing nature of political discussion. With reference to the US President’s use of Twitter, she said in a research note:
“It may prove easier to clean up the physical market than to overcome skepticism about the ultimate efficacy of its strategy in the age of Trump… OPEC’s burden is to show that it still has the appropriate tools to arrest price declines driven in no small part by White House policy.”
OPEC is an organisation designed to manage the supply of oil, not its demand. PVM Oil Associates’ oil analyst Stephen Brennock said in a research note published Wednesday:
“The fact is that sentiment is gripped by the weak macro environment and demand-side concerns rule the market … Accordingly, Brent will do well to stay anchored around $60 (a barrel) in the coming weeks.”
OPEC has experience of sitting out periods of reduced demand for oil. Adopting a sanguine approach is easy enough to do when the nature of business cycles is considered. The dynamic of the supply of oil has always been more of an issue for the OPEC members and looks likely to be even more so in the future.
Short-term noise includes reports such as the Bloomberg survey of this week that points to US crude inventories having contracted by 4.2 MMbbls over the last week. The Energy Information Administration (EIA) report is due Thursday 12thSeptember.
In the last decade, the US has more than doubled its oil output to 12.3 million barrels per day. This makes it the world’s largest producer. Until recently, however, the infrastructure needed to transport that crude out of Texas oil fields and onto the world market has been lacking. Just as the oil market is struggling with issues of oversupply, the US is about to introduce a new pipeline delivering a whole lot more.
The Plains All American Pipeline’s Cactus II pipeline just came online and connects the Permian Basin to the port town of Corpus Christi, Texas.
Citigroup anticipates that the new pipelines will allow US exports of oil to increase by 1 million barrels per day by the end of 2019. The report also points to further growth next year and suggests that another additional 1 million barrels per day will be passing into the global market by the end of 2020.