Oil prices have started to fall from their elevated levels, albeit slowly. Nymex WTI goes for $103.02 per barrel, down about 4 dollars since the previous report. A barrel of Brent will cost you $123.81, which is about $2.50 below its price two weeks ago. The oil markets are still volatile and with prices still this high, it would be premature to change the alarm level. We're still in the red.
Oil Alarm Level — Red
The focus lately has been on supply disruptions, or what is often referred to in the industry as shut-in oil. Producing oil is a tricky, complicated business. Consequently there is always some oil shut-in somewhere, a situation which is only made worse by geopolitical conflicts. A year ago the rebellion in Libya caused a small supply shock on global markets, which pushed up prices. The good news is that most of Libya's crude oil is back in production (1.4 of their 1.6 million barrels-per-day capacity). The bad news is that there are lots of small supply outages elsewhere.
Reuters, March 23 — Global oil supply outages are running at more than a million barrels a day, a Reuters survey has found, helping provide justification for the United States and Britain should they release strategic reserves in a bid to cut oil prices...
Civil unrest, adverse weather and technical glitches disrupted 1.2 million barrels per day (bpd) of global oil output in March on the 90 million bpd world market, according to a Reuters calculation from information provided by companies, government agencies and traders.
[My note: 90 million barrels-per-day (bpd) is an all liquids number, which includes natural gas liquids and biofuels. Global crude oil production capacity is about 76-77 million bpd.]
Following is the breakdown of global oil production outages by region and country as of mid-March.
MIDDLE EAST AND NORTH AFRICA - 490,000 bpd
Syria - Export outage totals about 150,000 bpd. Syrian oil output has been severely reduced since last year and its exports suspended since September due to international sanctions.
Before the conflict, Syria exported about 150,000 bpd of mostly heavy Souedie crude.
Yemen - About 140,000 bpd of Yemen's oil output has been reduced by months of political unrest over the last year. Output came to a near standstill in mid-February during a week-long worker strike at its largest oilfield.
Libya - Libya's crude output as of late March was about 1.4 million bpd, or 200,000 bpd below the full production level of 1.6 million bpd before the 2011 civil war. An official with Libya's National Oil Corporation said its exports are likely to increase to 1.4 million bpd in April, including some deliveries from tanks following some loading delays from March due to bad weather.
AFRICA - 350,000 bpd
South Sudan - South Sudan shut its crude oil output of roughly 350,000 bpd - about three quarters of the combined total from Sudan and South Sudan - in January after Sudan took some of the crude to make up for what Khartoum said were unpaid transit fees.
AMERICAS - 320,000 bpd
Canada - Oil output has been cut by about 320,000 bpd as production of Suncor Energy Inc's and Syncrude Canada has been cut by 220,000 bpd and 100,000 bpd, respectively, for unplanned outages. Both will be back online in April.
ASIA PACIFIC - 65,700 bpd
Australia - Cyclone Luna forced Apache and Woodside Petroleum to shut Stag, Enfield and North West Shelf oilfields last week. Woodside said on Monday it had restarted production at Enfield. After the restart, the production shut-ins total about 65,700 bpd. The figure includes the 8,800 bpd Stag field, which Apache said is expected to restart soon
Some of this oil will be back online in April, but the Sudan situation will not be resolved quickly. And then there is Iran.
And Iran's 4 million b/d is a bigger deal than all of those put together. Petrologistics [Reuters] estimates that boycott efforts have succeeded in reducing Iranian oil exports by 300,000 b/d. Whether that turns out to be the end of the story on curtailment of Iranian shipments, or is only the beginning, remains to be seen.
[And from Reuters, March 23]
"This is fundamentally very bullish," said Mike Wittner, head of commodities research at Societe Generale in the United States. "I think Iranian exports are going to go down much more, as the sanctions bite. It's a logical reaction for the market to go up on this."
According to Petrologistics, a Geneva-based oil industry consultant, Iranian exports may amount to 1.9 million bpd in March, down from about 2.2 million bpd in February.
A source at an oil company, which still deals in Iranian crude, said the evidence pointed to an overall drop in shipments in March, seeing a decline of at least 300,000 bpd mainly because European customers are taking less.
European buyers of Iranian crude including France's Total have already stopped buying the oil, which is subject to European Union sanctions from July 1. Royal Dutch Shell, is scaling back.
"We are taking less and less - very few barrels," said an official with a European oil company, until earlier this year one of the larger EU buyers of Iranian crude.
That's sufficient reason to keep the alarm level in the red. Iran is enriching uranium, but the irony here is that they are years away from building The Bomb, and everybody knows it, including the Israelis, who want to make a pre-emptive strike to further delay Iran's plans and score political points at home. We can therefore conclude that these new sanctions against Iran amount to little more than warmongering bullshit. In this context, we care about this nonsense because it is keeping the oil price high, which drives gasoline prices. President Obama is running around talking about the decline in U.S. crude imports, but he has pushed the sanctions which are primarily responsible for these high prices. Here's Martin Wolf on the subject.
Responding to his critics, Mr Obama said: “We are drilling more. We are producing more. But the fact is, producing more oil at home isn’t enough to bring gas prices down overnight.”
These remarks are correct, except for the last word. Producing more oil would have next to no effect on oil prices.
Moreover, if there is a specific cause for the rise in oil prices, it is the tightening of sanctions on Iran, which Republicans support. If, as many desire, military action is taken, the impact on oil prices and the world economy will be far greater.
In the longer run, a big reduction in U.S. demand, still 20 percent of the world’s total, might make an appreciable difference to prices. Moreover, the relative wastefulness of U.S. oil use, compared with other high-income countries, would make such a reduction quite easy to achieve. The best way to make this happen would be to raise prices, via higher taxation. But that policy is deemed un-American. It is a policy fit only for European wimps.
Yet, despite the absurd politicking, we should be concerned about the economic impact of high oil prices: A rise of $10 in the price of oil shifts $320 billion a year from higher-spending consumers to lower-spending producers, within and across countries. The 15 percent rise since December 2011 would shift close to $500 billion. The real price of oil is also very high, by historical standards. Further rises would take the world into uncharted territory.
Also see my recent post Hyping American Energy Independence if you haven't already read it. Could the oil world be any more absurd at this point? It seems not, but maybe the "best" is yet to come.
Where will oil prices stand in two week? Your guess is as good as mine.