Mid-Year Analysis On Oil Prices

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Written by OPIS – Oil Price Information Service (OPIS) by IHS Markit, an Aspect Partner, is one of the world’s most comprehensive sources for petroleum pricing and news information. 

A steady diet of curveballs may be the best way to describe the first half of 2018 for fuel and oil prices. Revisions to forecasts have been many, market bears turned into bulls, and rising retail gasoline prices are back in the headlines after a two-and-a-half-year hiatus.

International Markets

It all starts with the incredible discipline displayed by the Vienna Alliance (OPEC and non-OPEC producers) in keeping a lid on oil output. 

However, that discipline from producers met what has been an absolute collapse of Venezuelan production and IHS Markit said at times production cuts were 160% of the intended 1.2-million-b/d pullback established on Jan. 1, 2017. Additionally, even without falling Venezuelan production, OPEC and non-OPEC production was 120% of compliance.

The situation in Venezuela will be one to watch for the remainder of the year, as the South American country goes through an economic crisis. Not only has oil production been decimated, but food and medicine shortages have hit the population. According to the latest estimates, Venezuelan output is around 1.5 million b/d and, while it may be hyperbole to say production there could go to zero, it is not hard to imagine the country having trouble meeting its sales obligations going forward.

Venezuela does not look like it will exit from its economic crisis anytime soon. Spotlighting the country’s oil turmoil, an international court ruled that PDVSA had to pay ConocoPhillips $2 billion for the Venezuelan government’s nationalization of its projects. ConocoPhillips has looked to seize PDVSA assets in the Caribbean. This could set a very dangerous precedent going forward as more companies file lawsuits.

The other geopolitical factor watched closely is new sanctions on Iran from the United States. This time could be different, as the Trump administration may have difficulty drumming up widespread support for sanctions. However, there is some belief that Japan, South Korea and some European allies could trim imports of Iranian oil. On the other hand, it is believed that China will ignore sanctions and buy Iranian oil, especially if it is discounted.

President Trump’s removal of the United States from the Iran nuclear agreement, opting to re-impose sanctions, was initially deemed to not be a big deal. The United States going it alone on those sanctions was thought to have little impact. But with the new sanctions, the United States is throwing its economic weight around. Several large companies have ceased doing business in Iran because of upcoming sanctions, and the list is more likely to grow than shrink. 

U.S. Oil Markets

Geopolitical factors have taken on new meaning in 2018. They were also there in 2017 and 2016 (and before that, too), but in a much tighter market, those issues take on greater meaning.

Domestic crude oil production was expected to breeze past 10 million b/d in 2018, but few expected production to be knocking on the door of 11 million b/d as the midpoint of the calendar has been reached.

Sustained strong prices have continued to bring on more production, but producers, for example in West Texas at Midland, have turned out to be victims of their success. Production growth has outpaced take-away capacity, creating a disconnect between the local markets and the futures market, but also a major gap amongst the benchmark futures contracts.

Output exceeding take-away capacity has been a headwind for two crude markets, WTI at Midland and heavy Canadian crude, Western Canadian Select (WCS). It was not uncommon to see WTI discounts at the source in Midland Texas trading $10-15/bbl under the futures market, and at the same time, WCS discounts at times approached $30/bbl in the first six months of the year.

There’s much more to discuss at the midpoint of 2018, with so many curveballs being pitched at fuel prices.

Get a deeper analysis of fuel and oil prices in the upcoming OPIS Outlook Forecast Mid-Year Update.

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This post was originally published on the OPIS Blog. Read the full article at: http://blog.opisnet.com/oil-price-analysis-mid-year-2018

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