Earlier this week markets saw a significant jump in the price of oil. As well, oil's technicals could be signaling that the commodity has bottomed. But geopolitcal fundamentals will likely continue to drive volatility. Here's what could effect the price of oil this week and next:
Oil prices rose this week on news that stored inventory in the U.S. declined in the previous week. Brent briefly hit $80 per barrel on Wednesday, September 12. Another factor pushing oil prices up is the expectation by traders that the new Iran sanctions will have a much greater effect on the oil market than previously assumed. Analysts are now predicting that as much as 1.5 million barrels per day of oil from Iran may come off the market, that Saudi Arabia will not increase its oil production as much as previously assumed and that production from the U.S. shale oil industry will remain essentially stagnant until more pipeline capacity is available in 2019. These beliefs are raising prices for oil that will be delivered in October. Market watchers should remember that these are just forecasts. Shale oil production continues to grow, albeit not as fast as was previously predicted. Also, Saudi Arabia could definitely still decide to increase its oil exports.
U.S. sanctions against Iran's oil industry do not come into effect until early November. However, Tanker Trackers reports that Iran is already storing oil in tankers off of its coastline. According to the Tanker Trackers analysis, temporarily storing oil in tankers is common for oil producing countries. The difference here is that these tankers, which are collectively holding 15.3 million barrels of oil and condensates, have no intended destination. According to the Tanker Trackers report, Iran stored 40 million barrels of oil and condensates during the previous round of sanctions. After the sanctions ended, Iran sold off its entire floating storage. There was some suspicion that Iran made clandestine sales from its floating storage while the previous sanctions were still in place. This time around, oil market watchers should keep a close eye on the amount of oil and condensates Iran is building up and whether oil is being shipped from the floating storage, in contravention of sanctions. When, and if, sanctions end, Iran will likely try to sell this oil as quickly as possible, which should push against the rising prices caused by the sanctions.
The differential between WTI and Brent is now nearly $10 per barrel. This has made U.S. oil exports very attractive to South Korea and Japan, particularly, as those countries are seeking to replace their imports of Iranian oil. Oil producers in the U.S. are offering discounts. Asian buyers other than China—which is currently embroiled in a trade dispute with the United States—are taking advantage. This will only increase pressure on U.S. producers to export more oil, despite the discounts. The widening spread is also being fueled by fears that Brexit could result in a labor shortage for North Sea oil production. However, the MP from Aberdeen (where the bulk of the British oil industry is based) called these fears “scaremongering” and said that they are unfounded.
The northern portions of the Colonial and Plantation pipelines—which carry petroleum products—run through areas that may be affected by flooding from Hurricane Florence when she hits North and South Carolina. This could cause power outages that might disrupt the pipelines in their northern sections. North Carolina, Virginia, Washington DC, Maryland, Delaware and possibly New Jersey could be impacted and may see temporarily elevated gasoline prices as a result.
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