Three and a Half Year Highs. Oh My!

By: Mike Dombroski / April 19, 2018

Oil prices are now at their highest levels in three and a half years with May WTI trading at $69.01/bbl and June Brent at $74.32/bbl. Let’s review how we got here.

OPEC and non-OPEC’s production cuts for the past few years have certainly eased the glut of oil we had, albeit allowing U.S. oil production to surge to a record high of over 10.5 million barrels per day. Presently, OPEC and non-OPEC producers are cutting production by 1.8 million barrels per day. Over the past few decades, OPEC was notorious for having members being uncompliant in their pledged production cuts, however, this time has been a different story. OPEC has set a record for five straight months through March with regards to compliance of the 1.8 million barrels per day production cut target. These nations are set to meet tomorrow in Saudi Arabia and again on June 22nd to discuss its current oil policy and outlook on extending production cuts into 2019.

The most interesting OPEC nation to watch over the next month is Iran. Iran was responsible for 4% of the world’s oil production in March, but that oil production is in serious jeopardy starting next month. President Trump along with the support of the new Secretary of State, Mike Pompeo, have warned that the U.S. will pull out of the Iranian nuclear deal by May 12th unless Congress and European allies can offer an acceptable alternative solution. The current nuclear agreement with Iran was struck in 2015 with the United States, United Kingdom, Russia, France, China and Germany allowing Iran to produce and sell oil to the open market (among other economic benefits) as long as Iran allowed foreign inspectors to guarantee that Iran was not making a nuclear weapon. The fact that President Trump has claimed that Iran has broken parts of the agreement and wants to dismantle it, means that potentially 4% of the world’s monthly oil production could be taken off the table, adding to the bullish sentiment.

The leading oil producer of OPEC, Saudi Arabia, has made it public for quite some time that it will release Aramco, the world’s largest oil producing company, for an IPO (initial public offering). This week there has been rhetoric from multiple sources that Saudi Arabia will seek no changes to the OPEC agreement and would be happy to see oil prices to rise to $80-$100/bbl. This would greatly improve the share price of Aramco once it does go public, obviously benefiting its highest shareholders. Oil is Saudi Arabia’s prime revenue source and thus the crux that supports their lavish lifestyles when oil prices are high and the thorn in their sides which can reduce subsidies to its people when oil prices are low. Obviously the Saudis will try to do anything to prop up oil prices before it launches Aramco’s IPO as they’ll greatly benefit from it.

Finally, the war of words between the U.S. and Russia over the Syria situation has been in the spot light over the past month. The U.S. responded to Syria’s latest gas attack on its people by bombing three sites that held chemical weapons last Friday evening. The U.S. was careful not to strike Russian forces in any of the attacks in fear of provoking a strong Russian response and it appears no strong retaliation from the Russians or Syrians has been taken as of yet. This is an important situation to follow, as any further unrest in the Middle East could push oil prices even higher from these three and a half year highs.

May ULSD currently trades higher today by $0.0288 to $2.1199/gallon and RBOB is up by $0.0183 to $2.0866/gallon.

 

 

https://www.reuters.com/article/us-global-oil/oil-climbs-on-saudi-price-ambitions-and-u-s-stocks-draw-idUSKBN1HQ028

https://www.eia.gov/petroleum/supply/weekly/

https://www.cnbc.com/2018/04/19/us-crude-rises-as-oil-stockpiles-fall-gasoline-demand-hits-record.html


Mike Dombroski

Written by

Mike Dombroski


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