With roiling geopolitical tensions, a looming deadline for Iranian sanctions, and general production concerns, there is no shortage of potential catalysts that can be used to blame the recent escalation in oil market price volatility.
Monthly Crude Oil Chart: June-October 2018
However, as has been said before, much of the recent activity is a direct result of fear and speculation. It turns out, the reality is actually different than the current market narrative. Below, four facts that should quell fears and calm at least some of the wild speculation about any potential supply shortages.
1. US Oil Production Hits New Records
The US oil industry is proving more robust than expected. The EIA is now forecasting that shale oil production will increase by 98,000 bpd in November. It also raised its forecast for 2019 US oil production by 300,000 bpd to 11.8 million bpd. These changes are a result of greater than expected increases in production in Texas and North Dakota in July.
Despite the news back in June that a lack of infrastructure would constrain shale oil production, these producers continue to defy expectations. Higher than anticipated oil prices have meant that producers could afford to move rigs to areas with more pipeline capacity and can spend money on alternative transportation.
2. US Oil Exports Bounced Back Quickly
For some time now, traders and the oil industry were wondering when America’s ongoing trade dispute with China would impact the Asian country’s imports of US crude oil. In August, those fears were realized when China cut its oil imports from the US to zero from 384,000 bpd in June. Without China’s purchases, the US oil export industry suffered a significant setback that month.
However, American companies quickly found new customers for their crude oil, and exports rebounded almost entirely in September. US oil has become more attractive, because WTI has been trading at a significant discount compared to Brent. This has also helped US producers find global customers other than China.
3. Iranian Oil Exports Remain Robust
The narrative back in August was that Iranian oil exports were declining significantly as Iran’s customers cut back on Iranian oil in preparation for the November 4 round of US sanctions. As it turns out, this is no longer applicable. We are halfway through October and Iranian oil exports remain robust. TankerTrackers.com reported that Iran was exporting 2.2 million barrels of oil per day in the first two weeks of October, which is an increase of nearly 200,000 barrels per day from September.
This is not what US policymakers wanted only 2.5 weeks before sanctions go into place. Iran’s customers are supposed to be winding down their purchases of Iranian oil, not increasing them. Officially, the US is still committed to “zero” Iranian exports on the market, but it seems unlikely the US will achieve this.
4. Geopolitical Tensions Aren’t Impacting Oil Prices
Tensions between the US and Saudi Arabia have risen significantly over the disappearance of Saudi journalist and activist Jamal Khashoggi. US policymakers discussed sanctions on Saudi Arabia as a possibility and Saudi Arabia responded by threatening to cut off oil exports to the US or to cut oil production and spike oil prices.
Typically, geopolitical tensions of this type would mean a surging oil market. Other than a brief increase in oil futures on Sunday night, the markets have essentially ignored the Saudi-US situation. Market watchers did not fall for Saudi Arabia’s empty threat, and oil prices actually have declined so far this week on growing inventories.