Saudi Arabia: U.S. oil production keeps a lid on oil prices in August, will Hurricane Harvey lift it off in September?
August 29, 2017
The OPEC oil basket traded at USD 49.5 per barrel on 29 August, a small 0.1% increase from the same day in July. While oil prices gained 9.0% over the same day in 2016, they have decreased 7.1% from the start of the year, when they traded at USD 53.3 per barrel. Despite the mild month-on-month increase, oil prices are struggling to remain at levels above the USD 50.0-per-barrel ceiling.
U.S. oil stockpiles fell for an eighth consecutive week to the lowest level since the beginning of the year as of 25 August, according to the U.S. Energy Information Administration, with a large withdrawal of 5.4 million barrels from the previous week. In mid-August, Brent crude oil spot prices moved above those for delivery in future months, indicating tightening supplies and strong short-term demand. According to the latest OPEC Monthly Oil Market Report, OPEC and 14 non-OPEC oil-producing countries have, as of July, achieved a conformity level of 94% in voluntary reductions of total oil production levels (June: 98%). Taken together, such circumstances would normally encourage bullish sentiment for oil prices. However, caution seems to be taking precedent, as U.S. oil production remained high for most of the month. Moreover, despite remaining close to 100%, key OPEC and non-OPEC producers’ conformity levels have declined in recent months, casting doubts on the countries’ abilities to stick to the deal, which ends in March 2018.
According to the latest OPEC Monthly Oil Report, combined oil output in OPEC countries increased from 32.70 mbpd in June to 32.87 mbpd in July, mainly reflecting stronger production in Libya, Nigeria and Saudi Arabia. Saudi Arabia produced 10.07 mbpd in July, slightly up from 10.04 in June. In contrast, production in Venezuela, Iraq and Angola declined.
Looking ahead, it remains to be seen how Hurricane Harvey and subsequent flooding will affect global oil prices. U.S. oil production took a hit at the end of August, with approximately one-third of U.S. oil refineries affected by Harvey’s landfall, including the Saudi-owned refinery of Port Arthur—the largest in the U.S. The Gulf Coast, where Harvey made landfall, meets 6% of global demand (excluding the U.S.) for crude oil and other liquid petroleum fuels. While oil demand from crude oil refineries in the area dried up shortly before and after Hurricane Harvey, weighing down prices, demand may move in the opposite direction if disruptions persist, which would put pressure on them to rise.
Author: Edward Gardner, Economist