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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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U.S. And OPEC Flood Oil Market Ahead Of Midterms

OPEC and the U.S. are together adding enormous volumes of new supply, which together have softened the oil market.

In October, OPEC hiked oil production to the highest level since 2016, back before the oil production cuts went into effect, according to a recent Reuters survey. The higher output, led by Saudi Arabia and the UAE, come just as Iranian oil is going offline. Also, Libya saw a sharp rebound in production, although the country is not part of the OPEC+ production cuts.

The 15 countries in OPEC produced an average 33.31 million barrels per day in October, the highest since December 2016. That was also up 390,000 bpd from September. “Oil producers appear to be successfully offsetting the supply outages from Iran and Venezuela,” said Carsten Fritsch of Commerzbank.

Russia, which is not part of OPEC but part of the OPEC+ coalition, continues to produce at post-Soviet record highs.

Iran lost 100,000 bpd in October, due to buyers cutting back as U.S. sanctions near, but the losses were more modest than many analysts had expected. In fact, despite the hardline rhetoric from Washington, the U.S. is poised to grant waivers to several countries that are unable to cut their imports of Iranian oil to zero.

That was largely predictable. Top importers of Iranian oil, including India, China and Turkey, could not slash their purchases to zero without incurring a significant economic cost. The U.S. pressed these countries, but ultimately had to back down. “We want to achieve maximum pressure but we don’t want to harm friends and allies either,” U.S. national security adviser John Bolton said on Wednesday. He recognized that some “may not be able to go all the way, all the way to zero immediately.” The admission is notable since Bolton is widely known as one of the most extreme hardliners when it comes to Iran. Related: Cold Snap Could Send Natural Gas To $5

The waivers, along with efforts by Iran to work around the U.S. sanctions regime, means that the export losses could plateau. “It is doubtful whether Iranian oil exports will fall much further from their current level, however. After all, there are reports that India is to be granted an exemption by the US to buy Iranian oil. Without such exemptions, buyers of Iranian oil will risk US sanctions from next Monday,” Commerzbank said in a note.

Meanwhile, even as OPEC is boosting production, the U.S. is also adding supply at an impressive rate. The EIA just released U.S. production levels for August, revealing a massive month-on-month increase. The agency estimates that the U.S. produced a whopping 11.346 mb/d in August, an increase of 416,000 bpd from a month earlier. That level makes the U.S. the largest oil producer in the world, just a hair above Russia.

At 11.346 mb/d, the U.S. added 2.1 mb/d compared to August 2017, the largest increase over a 12-month period on record.

But even with OPEC production at a two-year high, and U.S. production surging at a torrid pace, the oil market is not necessarily on the verge of plunging into a new downturn. Despite the flood of new supply, the “surge does not seem to have overloaded the market,” according to Standard Chartered. Crude oil inventories have climbed significantly, but part of the reason for the increase is that refinery utilization is way down. Refineries tend to go into maintenance after the summer, but Standard Chartered said this has been a “longer-than-usual maintenance season.” That has led to inventory increases, but still, inventories are right in the middle of the five-year average. That also included a scheduled release of oil from the strategic petroleum reserve, a volume that was previously legislated by Congress. Related: World’s Cheapest Natural Gas Market Could Be Facing A Shortage

Nevertheless, market sentiment has soured, at least compared to before. Investors have sold off bullish bets on oil futures and the futures curve has flipped from backwardation into contango, a sign of increased bearishness.

“Given these (output) numbers, with Russia pumping hard and the United States and OPEC as well, and we are not really seeing a pickup in demand for another month ... it could indicate we’re back to the good old $70-80 range that persisted through April and August,” Saxo Bank senior manager Ole Hansen said, according to Reuters.

John Kemp of Reuters argues that the surge in production this year is the result of the increase in prices in 2017 and the early part of this year. Enormous production increases tend to come 9 to 12 months after a shift in prices. And because prices have moderated since April, the production increases could also level off next year, suggesting that the blistering rate of growth seen in 2018 probably won’t last.

But for now, the flood of new supply may have put a cap on oil prices in the near-term, barring any unforeseen outages.

By Nick Cunningham of Oilprice.com

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  • Tom Kirkman on November 01 2018 said:
    Related news. Russia, India and Iran are creating a new trade route alternative to the Suez Canal, *through Iran*.

    Announced just before U.S. sanctions against Iranian Oil / U.S. midterm elections. Next week should prove interesting on the global oil & gas entertainment channel.

  • Mamdouh G Salameh on November 02 2018 said:
    Untruths and more damn untruths. OPEC could not flood the global oil market with oil as it hardly has any spare capacity. Even Saudi Arabia and Russia combined could not add more than the 650,000 barrels a day (b/d) they have both already contributed three weeks ago.

    The claim by the US Energy Information Administration (EIA) that US oil production hit 11.346 million barrels a day (mbd) in August is very questionable at the best of times given the serious productivity issues facing the US shale oil production. Moreover, there is usually a difference between EIA’s weekly and monthly figures estimated 700,000 b/d to 1 mbd. Take these out of US production in August and we get a less exaggerated figure of 10.346-10.646 mbd.

    Moreover, if US oil production is rising so high, why then did the US release oil from the strategic petroleum reserve and why the US continues to import some 9-10 mbd and also why an MIT study published in December 2017 reached the conclusion that the US vastly overstates its oil production by 700,000 barrels a day (b/d) and 1 mbd.

    A bit of humility in reporting US oil production figures will go a long way towards making them less questionable.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Shawn Foster on November 03 2018 said:
    To respond to previous comment questioning why our crude imports are so high, you have to remember how much refined gasoline is then exported, as even many crude mining countries don’t have enough refinery capacity, for even their own domestic consumption.

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