Oil Bear Market Shows US Shale Boom Has Teeth

  • Date: 11/11/18
  • Sky News

The price of oil, as measured by its US benchmark, has entered bear market territory – in other words, a fall of 20% or more from its peak – in barely a month.

A barrel of US light crude oil, which hit a near four-year high of $76.41 on 3 October, was today trading as low as $60.06, representing a drop of 21%.

Brent crude, the European benchmark, is not quite there yet: it reached a peak of $86.29 on the same day and, earlier today, was trading at $69.99 at one point, representing a fall of just under 19%.

A barrel of Brent crude oil cost more than $110 in 2014
Image:A barrel of Brent crude cost more than $110 in 2014 but fell below $30 in 2016

But it would be no surprise to see it extend those falls into bear market territory.

There are a number of reasons why oil has sold off as rapidly as it has.

One is that, although US sanctions against Iranian oil exports finally kicked in earlier this week, the impact of those sanctions has been mitigated by the Trump administration’s decision to grant “waivers” to eight countries – China, India, Turkey, South Korea, Japan, Italy, Greece and Taiwan – allowing them to continue importing at least some Iranian oil for the next six months.

Those eight countries are Iran’s biggest customers and account for around three-quarters of the Islamic Republic’s oil exports.

Iran will not export as much crude as it has been. For example, China, its biggest single customer, is expected to buy around 360,000 barrels per day during the first 180-day waiver period.

That is around half of what it has been buying daily from Tehran, on average, since the beginning of 2016.

And India, which is Iran’s second largest customer, is expected to continue importing around 300,000 barrels per day, representing up to two-thirds of what it buys on an average daily basis.

So the global oil market is not going to be hit by a shortage of supplies from Iran just yet and, moreover, further waivers are expected to be issued once the initial 180 day waivers expire. And, in any case, any shortfall in supplies from Iran is likely to be more than covered by supplies from elsewhere.

The government is planning to lift an eight-year fuel duty freeze
Image:UK petrol prices started to fall this week as Brent continued to decline in cost

The second factor is that, thanks to the shale revolution, US supplies are growing rapidly.

America has already overtaken Russia and Saudi Arabia to become the world’s largest producer and figures from the US Energy Information Administration (EIA) suggest it was averaging 11.6 million barrels per day last week.

US crude stockpiles have increased for seven consecutive weeks and those are likely to be added to.

The EIA is predicting that output will reach 12.1 million barrels per day in the new year. To put that in context, the BP Statistical Review of World Energy 2018 puts global daily crude production at 92.6 million barrels per day for last year, so the increase is meaningful.

But it is not only the United States that has meaningfully raised oil production in recent weeks.

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