Crude Prices: What’s Fuelling Oil-price Rise?

Crude Prices: What’s Fuelling Oil-price Rise?

A recent Kotak Institutional Equities report states that the worsening socio-economic conditions in Venezuela, a major crude oil exporter, has led to oil production in the country falling from 2 million barrels per day (mbpd) in August 2017 to 1.5 mbpd in March 2018. This, and other supply-side factors, are what likely explain crude prices shooting up from $63.83/barrel (Brent crude) on March 1, 2018, to $73.59 on April 25. Mexico has also cut production—from a supply baseline of 2.4 mbpd, the country has brought output down to 2.1 mbpd. OPEC has maintained its supply cuts—as opposed to raising production to offset the reduced production by Venezuela and Mexico. This has led to a 2.4 mbpd overall reduction in production in March 2018 while just 1.7 mbpd of cuts was agreed to by the member of the oil-nations consortium.

The outlook for oil prices, thanks to supply-side factors, is further dampened by the expectation that US president Donald Trump will not extend the waiver of sanctions against Iran, possibly resulting in supply cuts to the tune of ~1 mbpd. Crude supply to the world market is also under the threat of action by Libyan militants that will push up prices further. The other supply constraint is that “midstream pipelines connecting Canadian oil sands to Cushing (US WTI delivery point) and Permian basin to the US Gulf coast are both operating at near-full capacity utilisation” and the situation is unlikely get better until new projects get completed in 2019.

This supply-demand imbalance has resulted in a world-wide deficit of oil production, which is expected to continue till the end of this year. This puts upward pressure on the price of crude oil, which is expected to settle at around ~$65/barrel, according to Kotak’s estimates. Read More

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