OIL’S SLIDE
Insiders had sudden rethink about how much oil would be pumped onto world markets International Energy Agency predicts inventories will exceed five-year average in OECD countries.
Prices have been in a rapid decline, losing nearly a third of their value in eight weeks,
It was only at the start of October that analysts were wondering if oil would soon cost $100 (U.S.) a barrel. Then a trap door opened and oil prices have been in a rapid descent since, losing nearly a third of their value in about eight weeks, a wild slide that is reminding investors of the great oil price collapse between 2014 and 2016. Too much oil What sparked the reversal? Investors and oil traders had a sudden rethink about how much oil would be pumped onto world markets in coming months. The main factors: booming U.S. output, more Iranian oil supply being available than had been expected because of U.S. sanctions waivers, plus major producers Russia and Saudi Arabia ramping up production since the summer. Inventories rising The surge in supply has reversed a key trend that underpinned the oil bull camp: inventories, or the amount of oil stored in tanks and on ships, looks to be rising again.
The International Energy Agency now predicts oil inventories will exceed their five-year average in OECD countries imminently.
If they keep rising, that could put even more pressure on prices to fall the way they did in 2014 when inventories swelled.
“There is a determination from Saudi and OPEC to target inventories to avoid a big build like it happened back then (2014-2016),” said Giovanni Serio, head of research at Vitol Group, the world’s largest independent oil trader. ”
If OPEC continues to respond to fundamental conditions, we should be fairly confident that stocks are not going to explode.” America pumping The most recent glut has been centred in the U.S., where crude inventories have built up for nine consecutive weeks as output hit record levels. The U.S. is heading toward becoming a net energy exporter by 2023, according to the International Energy Agency.
Weekly crude exports peaked at 3 million barrels a day in June this year, their highest level since a ban on exports was lifted in 2015, according to data published by the Energy Information Administration. Supply bottlenecks America’s rise to become one of the world’s top crude producers has outpaced the infrastructure needed to export the oil.
That has led to a divergence in the price of oil in the U.S., measured by West Texas Intermediate, the U.S. benchmark oil price, which has suffered more than the global Brent benchmark, as stronger than expected U.S. supply weighed on prices.
The two benchmark prices could converge late next year however, after additional export infrastructure comes on line, enabling more U.S. barrels to hit the global market.
Three major new pipelines are set to open up, adding a combined capacity of about 1.8 million barrels a day that will be aimed at Corpus Christi on the Gulf Coast, the largest export location for U.S. crude.
“Once the U.S. connects the Permian to the Gulf that oil could move to the international market in regular larger volumes,” said Harry Tchilinguirian, head of commodity market strategy at BNP Paribas. Oil price drama The recent collapse in the oil price has sparked higher volatility in the markets. Generally there is an inverse relationship between oil price direction and volatility—as prices fall volatility rises.
And prices are expected to remain volatile in the lead up to the OPEC meeting in early December, when it will become clear whether the cartel is prepared to remove more oil from the global market.
OPEC members are “staring at what oil producers fear the most, huge inventory builds and price collapse,” said Bob McNally, president of Rapidan Energy Group.
The fall in oil prices should follow through to gasoline, a welcome development for U.S. drivers. It could also give a boost to consumer spending and other parts of the economy.