Rising oil prices creating rumors and fake news
As anticipated, oil prices continued rising amid stronger demand. Prices reached levels not seen in four years. Brent crude rose to $84.16 per barrel. WTI rose to $74.34 per barrel. The Brent/WTI spread widened further to $9.82 per barrel. Bullish forecasts continue, with some analysts preparing the market for Brent at $90 and others predicting $100 per barrel.
With rising prices, rumors in the market abound. Fake news is everywhere. It’s tough to keep a grip on reality when even international news agencies start reporting baseless “facts.” Last week, Bloomberg put out a story that Saudi Arabia increased its October oil output to 10.7 million barrels per day (bpd), near its record production. That is true. However, in a fit of fantasy, Bloomberg went on to explain that this production increase was owing to pressure from US President Trump. In reality, Saudi Arabia increased production to answer market needs and fulfill customer demands. This is something the Kingdom has always done, as much as possible. Yes, Trump is tweeting and criticizing OPEC, but Saudi Arabia doesn’t set production targets based on social media sentiment.
Frankly, Bloomberg does not seem to be aware that Saudi Aramco had already set its October loading program in mid-September. Saudi Aramco sells all its crude on long-term contractual agreements. This is how it can best fulfill contractual commitments to all crude oil customers and ensure supply reliability through proper allocation of crude production. Hence, monthly crude oil availabilities are programmed in advance through the nomination/allocation process in a very critical and delicate operation.
The nomination/allocation process starts early in the previous month, after crude oil customers receive the monthly official sales price. Then customers submit nominations for their lifting schedule for the succeeding month. Saudi Aramco closely watches the incoming requests and makes arrangements to increase or decrease production as required. In recent months, Saudi Aramco allocated all the lifting schedules that were nominated by customers.
Fake news is everywhere. It’s tough to keep a grip on reality when even international news agencies start reporting baseless “facts.”
For the US market, a primary reason that gasoline prices are rising is the lack of investment in the midstream and downstream oil industry. Shale output has left some areas in the US awash with oil, but the distribution and refining industry have not kept pace. It’s impossible for Trump to tweet a new refinery into existence to alleviate rising gasoline prices, so instead he resorts to distraction tactics with his criticisms of OPEC. For decades, analysts’ warnings about the low levels of investment in the US’ midstream and downstream oil industry have been ignored. Marathon’s facility in Louisiana is the last new refinery built with high downstream unit capacity. It came online in 1977.
The upward tendency in oil prices refused to acknowledge the most recent Energy Information Administration (EIA) report on US crude oil stocks. The EIA report showed that US crude oil stocks rose by nearly eight million barrels last week to about 404 million. This was the biggest increase since March 2017. Additionally, the US’ Midwest refinery utilization rates dropped to 78.9 percent, their lowest since October 2015. Oil prices rose despite US crude oil production remaining at a record-high of 11.1 million bpd.
There are some expectations of a massive increase in the Brent/WTI spread. It could widen further to $15 per barrel. This would be the greatest discount in about five years, as more oil could end up in storage in Cushing amid limited export infrastructure. As inventories climb, WTI will suffer downward pressure. Growing shale oil production is facing the reality of the Permian pipeline capacity constraints. This will lead to a build-up of inventory in Cushing, Oklahoma, which is putting pressure on the benchmark US oil price, widening its discount to Brent Crude.
Refiners are very keen to calculate the size of the impact from the Iranian supply disruptions. An estimated 1.5 million bpd of Iranian oil could be removed from world markets. China, India, Japan and South Korea have indicated that they will cut purchases of Iranian oil.
It seems that the market has started prematurely addressing this concern with S&P Global Platts data reporting that Arabian Gulf sour crude oil grades have surged to four-year highs amid the global crude oil rally. Illustratively, December Brent/Dubai EFS, an indicator of Dubai’s strength relative to Brent, kept pace with the global rally in December ICE Brent crude futures. The narrowing Brent/Dubai spread implies equivalent strength for the Arabian Gulf sour crude grade.
- Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza