After a short-lived downturn following the failure of the Doha Conference last Sunday, prices rebounded Monday after Kuwaiti oil workers went on strike shutting in some 2 million b/d of oil production. Prices then surged to a five-month high on Wednesday after the weekly stocks’ report came in lower than expected and the inventory of distillates grew by an unexpected 3.6 million barrels. Conventional wisdom says that oil prices have to go back up sometime in the next year or two so that any small tidbit of bullish news spurs buying. However, the world still has a massive backlog of crude in stockpiles that has to be worked through before supply and demand are truly in balance. Futures closed Wednesday at $42.63 in New York and $45.80 in London, Brent’s highest settlement since November 25th.
There has been much discussion as to whether the oversupply of crude still exists. Some believe that the IEA is wrong about the 1.5 million b/d of excess production that it is currently estimating. They believe that outages in the North Sea, Nigeria, and Kurdistan have cut this by some 700,000 b/d, and the ongoing decline in US shale oil production and growth in demand has been enough to rebalance the markets.
There is still the issue of Iran, which says it can increase its exports to pre-sanctions levels by the end of June. At the minute, however, Tehran seems to be having trouble finding enough tankers to export its oil. Nearly half of its fleet of 55-60 tankers is being used for crude storage and many others are in need of safety overhauls so they can legally enter foreign ports. Many tankers are currently stuck in loading or unloading jams at various ports across the world and are unavailable for lease. Reuter reports that there may be as much as 200 million barrels of oil waiting somewhere for the jam at Chinese ports to clear. This much oil suggests that 100-200 tankers are involved in the slowdown. To top off Tehran’s troubles, some foreign owners would rather not get involved with Iran and its sanction problems at a time when the tanker market is booming.
The Saudis are coming in for much criticism in the wake of the debacle at Doha last weekend. It seems that Russia and the Saudi oil minister had approved a draft freeze agreement. When the conference convened, it was learned that the King and his son the deputy crown prince had vetoed the proposal unless Iran was willing to freeze. President Obama is currently in Arabia conferring with the King and attempting to broker a truce between the Saudis and Iran.
Activity is picking up in Libya. It seems the EU has recognized the UN’s new “unity” government and is offering fresh security help. The US has begun “sanctioning” Libyan politicians who refuse to get on board with the new government. The Libyans say that they have made significant progress in pushing Islamic State fighters out of positions they have held around Derna for a long time. EU and US special forces units and advisors have been active in Libya for several weeks now and the Islamic State is far from any sources of support.
There are reports that some 500 refugees were drowned off the Libyan coast in an attempt to get to Europe on Wednesday. This could increase pressure for a full scale Western intervention into the country to stop the human trafficking. Such a move could stabilize the country to the point where another million b/d or so of Libyan oil could come back into production.
