Friday, December 8, 2017
Oil prices climbed on Thursday, primarily due to three factors. The first is rising Middle East tensions in the wake of this week’s announcement that the United States is recognizing Jerusalem as the capital of Israel and is therefore relocating the U.S. embassy to Jerusalem. Traders determined that this revelation warrants a geopolitical risk premium on oil prices. Secondly, Nigerian crude production is imperiled by one of two main oil unions threatening to launch a nationwide strike on December 18th over what it said was a mass sacking of workers that joined the union. Last of all, based on Tuesday’s bearish API inventory data, some traders shorted the oil markets on Wednesday, anticipating bearish EIA inventory numbers. They got what they wanted and on Thursday took profits by closing out these shorts, which is bullish.
The goals of OPEC and its allies in concocting the reduced production agreement are to rebalance oil supply and demand and eliminate excess global crude inventories. The criteria for accomplishing the latter is reducing stockpiles in OECD nations, i.e., developed countries, to the five-year average. That ignores much global inventory, but it’s a matter of practicality, in that stock levels in a huge number of countries, even a nation as relevant as China, simply aren’t sufficiently transparent to allow monitoring. The problem is, for example, that as crude is exported from U.S. storage to China storage, OECD inventories decline and global inventories do not.
The point of the foregoing is to demonstrate that OPEC, and particularly Saudi Arabia, is masterful at trumping reality with perception. Another example involves Saudi awareness that the most closely watched inventories on the planet are those in the United States. Typically, if these stocks fall, oil prices rise. Therefore, since July of this year the Saudis have made a concerted effort to lower exports to the U.S. and consequently their crude exports into America fell to a 30-year low in October and such shipments were expected] to drop even further in November and December. It won’t be a surprise if these exports were redirected to non-OECD countries. Saudi Arabia had both help and hindrance in reducing United States crude inventories. Venezuela’s implosion has resulted in decreased shipments to the U.S. and lower Canadian exports were a repercussion of the recent Keystone pipeline leak. On the other hand, Iraq, OPEC’s serial non-compliance member, seized the opportunity to fill the gap created by the Saudis. Ten months sales of Basra crude to the U.S. total 170 million barrels versus 143 million barrels of shipments sent in all of 2016.
In case you’re wondering if U.S. exports to China are significant, for 2016, the answer is no. All of last year, just four vessels left the United States destined for China. However, in October 2017 alone, a record high nine ships, carrying a total of 369,000 bpd of crude oil, left the U.S. for China.