At 2:40 pm EST, WTI had fallen by 1.61% to $70.68. Brent crude was trading down 1.33% at $78.78—after hitting a multi-year high of $80 earlier in the week.
Despite the usual inventory rigamarole that moves prices, today’s oil climate has a host of catalysts pulling prices up and pressing them down—namely supply issues courtesy of Venezuela and Libya, and the possibility of disruption in Iran due to the sanctions. Meanwhile, Saudi Arabia and Russia, the mouthpieces of the OPEC/NOPEC production cut deal, are weighing on prices with promises to step in to fill any production gaps.
OPEC has routinely said they are not targeting a specific price, but the general opinion is that OPEC heavyweight Saudi Arabia needs higher oil prices in order to get enough for its Aramco IPO. But since oil has hit $80, Saudi Arabia, who has seemed to cool its IPO ambitions, has been steadfast in its generous commitment on behalf of OPEC to ramp up production as Venezuela struggles, and as many fear Iran may be blacklisted from oil exports under the weight of sanctions.
Supply problems usually mean higher oil prices, and OPEC has historically been happy to send oil prices higher through supply restrictions. And all the supply problems, real or imagined, are from OPEC members. The most egregious under-producer at present is OPEC member Venezuela, which has seen its production drop steadily over a couple of decades. But its production took a turn for the worse in the last two years, with sharper drops. Venezuela’s production has dropped from 2.3 million barrels per day in January 2016, to 1.6 million bpd in January 2018—with no end in sight to the drop off, particularly since Maduro took home a win in Venezuelan elections last weekend. Maduro insists that he is not the source of PDVSA’s problems, and that insinuating that is a “stupid simplification”.
Bad weather in Libya also took at least 120,000 barrels per day off the market, with production curtailments starting as early as May 17, as oilfield equipment stopped working. The outage is thought to be temporary.
For Iran, the production problems are not yet upon us, nor may they ever be, if Iran has its way. Some analysts are predicting as much as 1 million bpd could be taken off the market as Iran struggles to export its oil given the recent US sanctions that will soon go into effect.
Despite the outages, OPEC’s word that it may end the production deal in June or at least modify it to account for the production losses is good enough for the market. Prices have risen steadily through the month of May, with Brent trading at $73.13 on May 1, and hitting $80 earlier this week.