Oil prices reached highs last seen at the end of 2014 early on Thursday, with WTI Crude trading just below $70 a barrel after another drop in U.S. inventories and talk of Saudi Arabia reportedly pushing for oil prices as high as $100 a barrel.
At 10:20 a.m. EDT on Thursday WTI Crude was up 0.73 percent at $68.97 and Brent Crude was up 1.10 percent at $74.29.
Oil prices were boosted on Wednesday by the EIA weekly U.S. inventories report and a media report that Saudi Arabia would be pushing for oil prices to go as high as $100 a barrel, following reports from last week that it was aiming for $80.
The EIA report on Wednesday showed a 1.1 million barrel draw in crude oil inventories and a gasoline stockpile draw of 3 million barrels, compared with a half-a-million-barrel increase in the week before. Distillate inventories were also down, by 3.1 million barrels, after a weekly draw of 1 million barrels in the prior seven-day period.
Oil prices are also supported by the geopolitical risk premium, with the possibility of fresh sanctions on Iran and Venezuela spiraling further into crisis both threatening to take more barrels of supply from the market in the coming months.
“The Saudis and their colleagues in OPEC need higher oil for their fiscal positions and the Kingdom is on a bold and costly reform programme. So they might continue to squeeze the lemon while they have the chance,” Greg McKenna, chief market strategist at futures brokerage AxiTrader, told Reuters.
Some analysts, however, see the current rally as unsustainable, especially without an actual supply disruption.
“This is not to say that the current $74-plus Brent price is not vindicated by other factors, but based purely on global supply and demand data, prices should not be this high,” analysts at PVM told Reuters.
Daniel Lacalle, chief economist at Tressis Gestion, told CNBC on Thursday that “oil prices are high because the dollar is low” and warned that “massive supply management” has always been likely to lead to an “artificial” jump in the price of oil.
Related: Higher Oil Prices Boost Saudi Credit Rating
“That is a big concern … Because oil prices don’t generate crises; the abrupt and unexpected rise of oil prices creates crises,” Lacalle told CNBC.
Also today, the chief executive of oil major Total, Patrick Pouyanné, warned that high oil prices could start eroding—albeit slightly—oil demand growth.
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“Do not underestimate the higher price impact on demand...the outlook remains uncertain despite higher prices and a tighter market,” Pouyanné said at an industry event. The oil industry has to be a “little bit careful” wishing for higher prices, because the key characteristic of the market now is volatility, Total’s CEO said.
By Tsvetana Paraskova for Oilprice.com
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Moreover, a sound economic principle is to maximize the return on one’s assets to whatever level the global oil market can tolerate. With Saudi Arabia and other OPEC members sitting on more than 65% of global proven reserves, this principle should be their guiding strategy on oil prices.
Saudi Arabia and the majority of OPEC members need an oil price higher than $100 to balance their budgets. To achieve this goal, they have to bolster the current positive fundamentals in the global oil market by extending the OPEC/non-OPEC production cut agreement well into the future. This could be in the form of a permanent mechanism flexible enough to react quickly to a tightening in the oil market or a build in crude oil and gasoline inventories.
I have always argued that oil, unlike any other commodity, is priceless. Still, a fair price according to my calculations ranges from $100-130 a barrel. This is good for the global economy as it stimulates global investments, enables oil-producing countries to expand their production capacity to meet future global demand and also enables the global oil industry to balance its books. If this price range is too high, global oil demand will soon tell us.
The threat of rising US shale production has already been factored in by the global oil market as more of a hype than a reality.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
http://markets.businessinsider.com/commodities/news/us-oil-industry-mismatch-to-benefit-some-shale-producers-2018-4-1021516367
Excerpt:
Super-light crude is flooding the US oil market, and there's little demand to meet it.
All of the industry's growth in the US over the last year was thanks to crude with a gravity above 40 on the American Petroleum Institute's scale, which measures the weight of a petroleum liquid compared to water, according to analysts at Morgan Stanley.
That's a problem for domestic shale explorers. Most refineries in the US are designed for heavier crude grades, around 32 API. And refiners are running out of room to process super-light shale without seeing losses.
"Domestic refiners cannot take much more of this and are close to hitting the 'shale wall,'" the analysts said.
Options to export what US refiners don't want are limited. Demand for superlight crude outside of the US is modest.
End Excerpt.
Note that there is a typo in the article (billons of barrels instead of millions).
I think that the real limiting factor regarding condensate demand is not necessarily what refiners can process, but the percentage of the total Crude + Condensate (C+C) intake that has to be actual crude oil*, in order to meet the demand for the full spectrum of refined products.
Of course, the real story--which almost no one is talking about--is that we have probably seen little, if any, increase in actual global crude oil production since 2005.
One wonders if we are in the early stages of a global bidding war for actual crude oil. Note that the current annualized rate of increase in monthly Brent crude oil prices since January, 2016 has been almost 40%/year.
The post-2005 gap between rates of increase in global gas production versus global C+C
production:
http://i1095.photobucket.com/albums/i475/westexas/Global%20quotCRUDE%20Gapquot%202002%20to%202016_zps9oyfiqpp.jpg
*Generally defined as crude oil with an API gravity of 45 or less, but note that the maximum API gravity for WTI crude oil is 42 degrees.