Energy

Major Threats May Drive Oil Prices Higher

Andyminicooper / Wikimedia Commons

The supply of crude oil worldwide is extremely high, but that could end quickly. The International Energy Agency reports that disruption in supply could press crude to the $70 to $80 a barrel range.

In its Oil Market Report, the authors wrote:

We are entering a very crucial period for the oil market. The situation in Venezuela could deteriorate even faster, strife could return to Libya and the 53 days to 4 November will reveal more decisions taken by countries and companies with respect to Iranian oil purchases. It remains to be seen if other producers decide to increase their production. The price range for Brent of $70-$80/bbl in place since April could be tested. Things are tightening up.

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Production from the United States, Saudi Arabia and Iraq have helped cap prices. On the other hand, along with problems in Venezuela and Libya, American sanctions against Iran will cut into supply.

The authors also pointed out that for the time being, demand from major regions has been soft:

As far as oil demand is concerned, following an increase of 1.4 mb/d in 2018, growth next year will be 1.5 mb/d. Even so, in 2018, we are seeing signs of weaker demand in some markets: gasoline demand is stagnant in the US as prices rise; European demand in the period May-July was consistently below year-ago levels; demand in Japan is sluggish notwithstanding very high temperatures and will be further impacted by the recent natural disasters.

However, these trends by themselves cannot offset a sharp drop in Venezuelan exports. The nation has the world’s largest proven oil reserves. Political turmoil and deteriorating infrastructure in the oil production system have made it almost certain exports will continue to fall in the long term. The Petróleos de Venezuela, the nation’s state-owned oil company, has lost significant refinery capacity. The nation’s financial disaster will make it nearly impossible to fund improvements.

The chances oil will reach $80 a barrel are rising.

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