Pressure on Crude Supply Supports Market

10/07/2019 11:14 am EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Numerous geopolitical issues are putting pressure on crude oil supply, reports Phil Flynn.

Crude oil is finding support on more surveys that show a big drop in OPEC oil production.

Reuters reports that, “On the supply side, deadly anti-government unrest has gripped Iraq, the second-largest OPEC producer. Iraq’s oil exports of 3.43 million barrels per day (bpd) from Basra terminals could be disrupted if instability lasts for weeks, Ayham Kamel, Eurasia Group’s practice head for Middle East and North Africa, said in a note.  “Any oil production disruption would occur at a time when Saudi Arabia has lost a significant part of its energy system redundancies (spare capacity),” he said.  Also, the major Buzzard oil field in the British North Sea was also shut for pipe repair work, China’s CNOOC said on Friday.

Libya’s National Oil Corporation (NOC) said on Sunday it would close the Faregh oil field at Zueitina port for scheduled maintenance from Monday until Oct. 14.

 Bloomberg is also reporting that, “U.S. troops will stand aside when Turkish forces invade northern Syria in the coming days, the White House said. President Erdogan has said the incursion may be imminent. He and President Trump spoke yesterday by phone. The comments signal the U.S. will allow Turkey to advance against Kurdish forces”.

The oil market is finding stability as it realizes that last week’s deep slide was overdone. OPEC's slide in oil output along with faltering U.S. production and record U.S. oil exports will more than likely lead to a big draw in U.S. oil inventory. Last week the American Petroleum Institute (API) reported a big draw but the Energy Information Administration (EIA) did not. The EIA will have to correct that. In the meantime, according to Baker Hughes, the U.S. oil rig count fell yet again by 3 to 710 last week. The rig count has declined in 30 of the last 40 weeks so far this year.  We believe that U.S. oil production will start to stagnate as investment dries up. U.S. oil production has stalled.

Bloomberg News reports that, "Newly commissioned Permian basin crude pipelines have yet to boost U.S. crude exports, as the ongoing U.S-China trade war weighs on demand from Asia. The U.S. Census Bureau said exports averaged 2.73 million barrels-per-day in August, up just 40,000 barrels from a month before. That’s despite the start of two widely anticipated crude pipelines from West Texas to the Gulf Coast. Plains All American LP’s began service on its Cactus II crude pipeline in August and loaded cargoes for export that month. EPIC Pipeline Co LP started operations on its oil pipe in August as well. But the lines, with a combined capacity of more than one million barrels-per-day may not be in full use.

“A lot of capacity will eventually be online from those pipes, but it would take some time before all of that becomes available. We shouldn’t expect to see all of that show up in one month,” said John Coleman, an analyst at consultant Wood Mackenzie.

Also, the U.S.-China trade war which has in part weakened global oil prices is affecting demand as well as production. Total U.S. crude production in July fell to the lowest levels since February, according to government data. Chinese buyers reduced their purchases in U.S. crude for August ahead of the start of a 5% tariff on American oil. 

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