Oil Briefly Reaches $70 as Buoyant Global Economy Bolsters Demand

Oil Briefly Reaches $70 as Buoyant Global Economy Bolsters Demand

2018-01-16 08:42:22

For instance, the shutdown in December of a British pipeline system in the North Sea removed an estimated nine million barrels of oil from the market over nearly three weeks. The move, which was made after the pipeline’s new owner, Ineos, found flaws in the system, propelled prices higher. A record-breaking cold snap in the United States, meanwhile, pushed up demand for heating oil, bolstering demand.

But now, there are additional pressing issues.

Traders are worried that political unrest in Iran, a major OPEC producer that accounts for more than four million barrels of oil a day, could lead to reduced output. There is also concern that, over the longer term, a violent government crackdown on demonstrations might lead to a resumption of international sanctions, which would cut into Iran’s ability to export oil.

For now, supplies from Iran have not been affected, but traders and analysts are nevertheless watching the rallies and their consequences.

Political risks elsewhere are also helping to push prices higher, including long-running tensions between Iraq’s government in Baghdad and the autonomous Kurdish enclave in the north, and the collapse of Venezuela’s oil industry. Both countries are major suppliers of crude — Iraq produces 4.5 million barrels of oil, and Venezuela adds around 1.8 million barrels — and any disruptions there could have a significant impact on global markets.

Oil Prices: What to Make of the Volatility

Over the last two and a half years, the oil industry experienced its deepest downturn since at least the 1990s.

There are also factors mitigating a relentless rise in prices, though.

For one, the higher prices would most likely lead to increased investment and exploration for oil and, eventually, more production. This is especially true of smaller producers in the United States, whose output is already growing.

There is skepticism over whether drillers in Texas and elsewhere can increase output fast enough to create another glut. “There is a natural limit to what shale can do,” said Antoine Rostand, president of Kayrros, a market research firm. “Trees don’t grow to the sky.”

But these so-called swing producers have been crucial to previous price declines.

The International Energy Agency, in an Oil Market Report published in December, noted that new supplies coming onto the market, particularly from the United States, might still exceed growth in demand in the first half of the year.

On the whole, the oil industry appears to be well down the road of having adjusted to the steep price falls that began in 2014 and saw oil dipping to the $30-a-barrel range.

Among the shifts: OPEC has taken a more active role in managing global energy markets, with Russia — which is not a member — unofficially replacing weakened or uncooperative cartel members like Iran, Nigeria and Venezuela.

Oil companies have also reshaped themselves, sharply increasing efficiency and reducing costs to a point where they are profitable at current levels, or even lower ones. They have cut huge numbers of jobs, simplified the designs of their exploration infrastructure and embraced new technologies. Indeed, the availability of supplies at those lower costs may be the best bet for keeping recent price rises under control.

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