Oil prices surged to their highest level in more than three years on Thursday, as the number and volume of supply outages continues to rise. The odds of a significant shortfall in supply are also growing by the day. With U.S. midterm elections nearing, the more oil prices continue to rise, the more likely it is that President Trump decides to tap the strategic petroleum reserve (SPR) to tamp down oil prices just ahead of the November vote.
The 180-degree turnaround in the oil market from May is pretty staggering, even for an oil market steeped in volatility and uncertainty. In late May, rumors of higher output from Saudi Arabia and Russia led to a crash in prices, and led to speculation of another lengthy downturn. By late June, however, it isn’t clear that even a massive 1-million-barrel-per-day increase from OPEC+ will be enough to fill the worsening supply gap.
That means higher oil prices are likely. WTI has spiked by about $8 per barrel since last week, and continues to climb higher. “We are in a very attractive oil price environment and our house view is that oil will hit $90 by the end of the second quarter of next year,” Hootan Yazhari, head of frontier markets equity research at Bank of America Merrill Lynch, said. “We are moving into an environment where supply disruptions are visible all over the world… and of course President Trump has been pretty active in trying to isolate Iran and getting U.S. allies not to purchase oil from Iran,” he added.
As has been widely reported, the Trump administration has aggressively pressed Saudi Arabia to boost output to offset declines from Iran. Saudi Arabia has complied, promising to ramp up output to about 11 mb/d in July, up from less than 10 mb/d in May. It’s an astounding increase, both in terms of volume and the speed of the increase.
But it still might not be enough. Outages in Libya, Venezuela, Iran, Canada, Angola and Kazakhstan will probably more than overwhelm the increase in supply from Saudi Arabia.
That raises the odds that Trump turns to the SPR to head off higher oil prices. “We think that WTI would not have to advance much further before the U.S. Strategic Petroleum Reserve (SPR) is brought into play,” Standard Chartered wrote in a note. “Higher gasoline prices, particularly in the Midwest, are likely to provoke a SPR release in the run-up to November’s mid-term elections.”
The speculators are at it again in the oil market, pushing up prices beyond the fundamentals. Sure the market is tighter than it was two years ago, but one look at gasoline inventories tells you there are more than ample petroleum supplies. In fact we have more gasoline inventories than a year ago, and we still have over 400 million barrels of oil in storage with both saudi arabia and russia now free to increase production limits going forward, something russia has been chomping at the bit to do the last year of the OPEC deal. Throw in the US Oil production near 11 million barrels per day at all time record levels, and things are not near as tight in the oil market as the oil bulls would have you believe right now.
How do you know there is a bunch of rampant speculation in the oil market beyond the fundamentals, just look at how many speculators ran from the market in front of the most recent OPEC meeting. We dropped from $72 a barrel all the way down to $64 a barrel in two weeks, most of the move coming in five short days. Why this is important is that nothing changed in the fundamentals during those five days or two weeks, what changed was event risk for the oil speculators. Rampant over speculation is nothing new in the oil markets, and is part of the problem with oil markets in general. Once the new money starts flowing into a market it brings in a lot of oil tourists causing prices to rise above the fundamentals. This happened in 2007 right before the economic collapse, and is helping further set the stage for the next economic collapse. Trump realizes the fact that higher gas prices offsets his tax cuts, and serves to undermine his stimulus boost for the economy.
U.S. oil prices slipped on Monday marked a modest decline, finding some support from crude export disruptions in Libya and recent data showing tighter U.S. supplies.
Brent prices, however, suffered a sharp loss as traders weighed expectations for higher global output. Crude had seen even sharper losses in early trading, stemming from a weekend tweet from President Donald Trump that talked about a big potential production increase from Saudi Arabia.
August West Texas Intermediate crude on the New York Mercantile Exchange CLQ8, -0.12% fell by 21 cents, or 0.3%, to settle at $73.94 a barrel, after trading as low as $72.51. September Brent LCOU8, -2.36% dropped $1.93, or 2.4%, to $77.30 a barrel.