Crude oil prices gained about 18 percent in January. Brent crude hit $63.63 a barrel, the highest since December 7, and was up 23 cents at $62.98. US crude hit a 2019 high of $55.75 and was later up 5 cents at $55.31.
The three largest oil producers; Saudi Arabia, Russia and US, are locked in a new world order that could mean more volatile crude oil prices. The US has become the world’s largest producer, and thus, has become a major factor in world crude oil supply. But the combined strength of Saudi-Russia alliance, means new market fundamentals and tensions that will square up with US.
The Organization of the Petroleum Exporting Countries (OPEC) deal defied US President Donald Trump’s pressure to maintain oil flows and keep prices low. OPEC and its allies began a new round of supply cuts in January. These curbs, led by Saudi Arabia, have been compounded by involuntary losses that the Venezuelan sanctions could deepen. OPEC crude output fell the most in two years as the group implemented almost 80 percent of its new production cuts deal.
Saudi Arabia cut deeper than pledged, while its close allies, United Arab Emirates and Kuwait, also made sizable reductions. Those deliberate curbs were compounded by involuntary output drops in Iran, targeted by US sanctions, and Libya, both of which were exempt from the group’s agreement.
Output from OPEC’s 14 current members fell by 930,000 bpd last month to 31.02 MMbpd. OPEC’s 15th member, Qatar, left the group at the end of December.
While OPEC and its allies are cutting output, US is expanding supply. Nonetheless, recent figures showed a drop in the number of US oil rigs to their lowest in eight months, lending prices some support.
“A break through $55 in WTI and $65 in Brent would be a very bullish signal for these and could be the catalyst for more significant upside, with oil having stabilised over the last few weeks following the post-Christmas bounce,” Craig Erlam, senior market analyst at brokerage OANDA, stated in a briefing.
The US sanctions on Venezuela will limit oil transactions between Venezuela and other countries and are similar to those imposed on Iran last year, some analysts said. The US government is considering a release of oil from the strategic petroleum reserve (SPR). The only problem is that the SPR does not contain heavy crude. Already the market for heavy oil is tight while that for lighter oil is much looser. US refiners that import heavy oil from Venezuela are now looking for alternatives. Canada and Mexico have heavy oil, but have little scope to increase supply. US domestic medium and heavy sour grades, including Mars Sour, have seen their prices jump.
PDVSA, Venezuela state-oil company, is scrambling to renegotiate contracts. PDVSA is trying to work around US sanctions, seeking fuel swaps and intermediaries.
“We are trying to redo the contracts. It is not yet entirely clear how because customers are being individually called, but we are studying alternatives,” a PDVSA said in a statement.
Meanwhile, Iran is trying to sell crude oil on its domestic energy exchange, despite lukewarm interest from traders in three previous offerings, with another 1 million-barrel auction, the country’s oil ministry said.
The bourse, which Iran has used to continue selling its crude in the face of US sanctions on international sales, will also be used to offer gas condensates, likely sometime in the next few weeks, according to Amir Hossein Tebyanian, National Iranian Oil Company’s representative to the exchange.
“National Iranian Oil Company has decided to present a diverse basket in the energy exports arena and it will issue a statement to carry this out soon,” Tebyanian was quoted as saying by Iran’s oil ministry news service Shana.
Iran is struggling to find new buyers for its crude after US sanctions came into force November 5 and is using alternative methods of luring buyers including the domestic exchange, or bourse.
The bourse is intended to allow the private sector to buy the country’s crude to resell into the international market, but buyers have largely stayed away for fear that any transactions could still be subject to the sanctions.
FRANK UZUEGBUNAM
