Oil prices haven’t changed much over the past week. Brent Crude fell slightly below $80 per barrel for the first time in a month and settled at $79.78 per barrel by the week-ending close on Friday. WTI also fell slightly below $70 per barrel for the first time since mid-September and settled at $69.12 per barrel by the end of the week.
Mostly, oil prices deteriorated amid the easing of concerns on supply shortages. This also led the WTI market structure to shift from backwardation to contango — implying that markets are well supplied. The shift to contango is primarily due to saturated oil volumes in pipelines heading to Cushing, Oklahoma, the pricing point for the WTI Nymex contract. However, WTI as a land-locked benchmark isn’t a reasonable reflection of other seaborne benchmarks. Hence, it is not necessarily indicative of a truly well-supplied market.
The US Energy Information Administration (EIA) reported a record average for US crude oil output of 11.1 million barrels per day in September, which will further widen the Brent/WTI spread amid pipeline and export constraints. Despite the widening Brent/WTI spread that should support WTI-linked crude competitiveness, S&P Global Platts reported that the crude inventories buildup was due in large part to a sharp decline in export activity. Crude exports averaged 1.78 million barrels per day, down 30.8 percent from 2.58 million barrels per day the week prior.
The increase in US oil output came simultaneously with seasonal declines in refining capacities expected before the refinery turnaround for the winter season.
This has resulted in crude oil inventories that continue to build, adding 6.49 million barrels. While there has been a decline in exports due to infrastructure limitations, the stock buildup is mostly due to lower US refining capacity ahead of the winter turnaround maintenance season. The EIA reported US refining capacity use at 88.8 percent, while it was at above 97 percent during the summer months.
With oil futures, it seems that sentiments are following global equity markets. The most bearish news might be that US oil exports to China slid down to nothing in August from about $1 billion of crude just two months earlier. Some commodities traders believe that the upcoming sanctions on Iran are already priced into the market.
Saudi Arabia, as the world’s largest oil exporter and OPEC’s largest producer, has continued to raise production. In recent months there has been a 20 percent increase in Saudi Aramco’s drilling activities. The Kingdom has no desire to see oil price hikes or steep price fluctuations and has repeatedly asserted that it plans to continue its primary role as swing producer to balance oil markets and stabilize the global economy. Other OPEC members continue to meet targets and there is little fear of unrest disrupting production.
Despite Saudi Arabia having the largest spare capacity for oil production, it has continued to invest billions of dollars. This investment means it alone provides more than 10 percent of global crude requirements with the largest oil infrastructure and oil export capacity in the world and there is no sign of any policy change in this regard.