Are Middle East Tensions Still a Key Driver of Oil Prices?
Tensions between the United States and Iran continue to simmer with President Trump announcing his decision to call off the landmark Obama-era nuclear deal. Fresh sanctions by the Trump administration only worsened matters. And things came to a head on Jul 19, when Tehran seized British oil tankers on grounds of violating international regulations.
However, WTI crude price increased only slightly more than 1% on Jul 22, far lower than what was apprehended going by tradition. Currently, the United States produces over 12 million barrels of oil a day. According to CNBC, the country has come to dominate the global oil exports market. Production growth in the United States continues to outstrip consumption, keeping global crude prices in check.
United States Fuels Rise in Non-OPEC Supplies
According to a new report from OPEC released on Jul 11, non-OPEC crude oil supply is estimated to rise by 2 million barrels per day (bpd) in 2019 and 2.4 million bpd in 2020. On the other hand, global oil demand will increase by around 1.4 million barrels per day in 2019 and 2020.
Further, per the latest monthly productivity report published by the U.S. Energy Information Administration (EIA), oil output from seven major shale formations will likely rise 70,000 bpd in July 2019. Strong supplies are suppressing oil prices, a phenomenon which is being compounded by weaker-than-expected demand.
In the past, geo-political disturbances easily disrupted global oil supply, raising prices and weighing on the global economy. But after the shale revolution, the equation has changed drastically with supply becoming increasingly responsive to price changes. Per the EIA, U.S. oil exports are projected to rise by 1 and 1.5 million bpd in 2019 and 2020, respectively.
This will likely reduce exports from Australia’s Gold Coast. But even after the loss of crucial Iranian output and production controls enforced and extended by OPEC, U.S. shale oil is not only meeting demand but also exceeding it.
Major U.S. shale producers include Exxon Mobil XOM, Chevron CVX, Valero Energy VLO and Phillips 66 PSX. Exxon Mobil has gained 9.9% in the year-to-date period. Meanwhile, Chevron, Valero Energy and Phillips 66 have gained 15.5%, 11.3% and 17.9%, over the same period. Each of these stocks has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
At first glance, these U.S. shale producers’ performance seems robust. However, a quick comparison with the S&P 500, which is up at 19.8% year to date, leads to a different conclusion. The underperformance versus the broader market indicates that such oil companies have lost significant pricing power due to abundant crude supplies.
Hurricanes Create Significant Oil Price Spikes
In 2017, Hurricane Harvey shutdown refineries, flooded wells and caused a severe oil production outage. Eleven refineries in the Gulf of Mexico produce 2.7 million bpd of crude, which accounts for nearly 14% of U.S. refining capacity. All of them had to be shut down following severe weather conditions. In order to offset the resulting production loss, the Federal government had to release 4.5 million barrels from the strategic reserves.
Hurricanes Florence, Katrina, Irma and Jose have had a similar devastating impact on U.S. crude production. In fact, production was also lost while clearing debris from channels, wells and ports, which was necessary to restart the smooth flow of oil to refineries.
On Jul 9, Hurricane Barry halted 1.1 million bpd of production. The figure is significantly lower than daily U.S. crude output, but it did trigger an oil price rise to $60.38 per barrel even before the storm made a landfall. A report from the Bureau of Safety and Environmental Enforcement states 59% of oil production was stopped even before the storm reached the shore. S&P Global Platts Analytics estimated a loss of about 350,000 barrels per day production in Gulf of Mexico during July.
It is evident from recent events that tensions in the Middle East no longer play a big role in determining oil price movement. Market watchers should instead be wary of the U.S. hurricane season since it leads to significant stoppages, boosting crude prices significantly.