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Why Oil Is Still Underpriced

Oil prices are pulled in…

Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Large Crude Build Forces Oil Prices Lower

A day after the oversensitive oil market yet again demonstrated surprise at API’s estimate of a 2.13-million-barrel crude oil inventory draw, the Energy Information Administration’s official figures refuted that: the authority reported an increase in U.S. commercial crude oil inventories of 6.5 million barrels for the week ending October 12.

EIA’s report comes amid relatively stable prices as the tension between Saudi Arabia and the Untied States prompted by the suspicious disappearance of Washington Post columnist Jamal Khashoggi was countered by oil demand forecasts from OPEC and the International Energy Agency.

Both the oil producers’ cartel and the international authority this week had bad news for oil bulls, forecasting demand growth will slow down both this year and in 2019. Although in his comment on the news Bloomberg’s Julian Lee said that this does not necessarily mean oil prices will follow down, it was reason enough for Brent and WTI to stop rising so fast.

The EIA said refineries processed 16.3 million bpd of crude last week, compared with 16.2 million bpd a week earlier. They churned out 10.4 million bpd of gasoline, versus 9.7 million bpd a week earlier, and 4.8 million bpd of distillate, down from 5 million bpd in the prior week. Related: U.S. Shale’s Glory Days Are Numbered

At the time of writing, Brent crude was trading at US$81.55 a barrel, with WTI at US$72.12, both up from yesterday’s close slightly. Prospects remain mixed. Just yesterday Goldman Sachs warned of an oil surplus on the global market, to emerge in 2019 because of higher utilization of spare capacity. This, the investment bank’s commodity analysts said, would offset the loss of Iranian crude after the November sanctions enter into effect and swing the market into an excess of supply.

What’s more, Saudi Arabia’s warning it will retaliate if the United States decides to punish it for Khashoggi’s disappearance, seems to have lost whatever substance it had when it was made on Sunday. As Reuters’ John Kemp noted, “self-interest makes it improbable the government will retaliate by reducing oil sales or trying to drive up prices,” which has reduced the upward potential for oil for the time being.

By Irina Slav for Oilprice.com

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  • Mamdouh G Salameh on October 17 2018 said:
    Increases in US commercial crude oil inventories are becoming farcical. The US Energy Information Administration (EIA) has been using such announcements to halt the rise in oil prices. While such announcements have a few minutes effect on oil prices, prices will soon resume their surge.

    The back tracking by President Trump on his threat of severe punishment on Saudi Arabia has obviated the need for Saudi Arabia to retaliate against the United States by reducing oil sales or trying to drive up prices.

    John Kemp is therefore, wrong to assume that self-interest will make it improbable that the Saudi government will retaliate. Certainly President Trump took the Saudi threat seriously enough to start back tracking on his threat of severe punishment on Saudi Arabia.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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