Why crude oil prices are flirting with $60 per barrel

Crude oil prices finally broke the 2-year highs and the $60 per barrel mark on rising confidence among the world’s top producers for extending a deal to rein in output in addition to robust data from the Energy Information Administration (EIA) which showed that US crude inventories fell by 5.7 million barrels by middle October to 456.49 million barrels.

Before now, prices struggled to break the $60 per barrel mark. Brent hit $59.77 per barrel on September 26, but was back to $55 per barrel a few days later.

But the jinx seem to have been broken. Brent futures has risen by $1.14, or 1.9 percent, to settle at $60.44 a barrel after hitting a session peak of $60.53, the highest since July 2015 and more than 35 percent above 2017 lows touched in June. US West Texas Intermediate crude oil (WTI) was up $1.26, or 2.4 percent, at $53.90 after reaching a session peak of $53.98 a barrel, the highest since early March.

Saudi & Russia leaning towards extension

There are possibilities that the oil cartel and the non-OPEC producers are increasingly looking at extending the production output cut deal through 2018. Saudi Arabia and Russia are leaning towards agreeing to extend their production limits through the end of 2018, a move that could be finalized at the upcoming meeting in Vienna on November 30. With those two countries on board, it would be likely that the rest would fall in line. An extension through the end of next year is rapidly becoming the baseline assumption for the November meeting.

OPEC and other major producers including Russia have pledged to reduce production by around 1.8 million barrels per day (bpd) to drain a global supply glut.

“If OPEC and their non-OPEC partners can agree to extend their production curtailments through 2018, then we estimate the oil market will remain in modest under-supply until 2019,” US investment bank Jefferies said.

Return of geopolitical flashpoints

Tensions in the Middle East have risen sharply. The instability is increasing risks to supply from key oil-producing areas.

Iraqi government forces captured the major Kurdish-held oil city of Kirkuk while responding to a Kurdish independence referendum.

There are concerns that fighting could disrupt supplies. Already, Kurdish oil workers abandoned Kirkuk oil fields ahead of the advance by the Iraqi government, which was backed by Iranian militias. The workers shut down some oil fields, and the incoming Iraqi forces found a lack of equipment as well as the knowledge of how to restart the fields. That has kept the 500,000 bpd Kirkuk oil field cluster offline.

The Iraq crisis adds to the dispute between the United States and Iran. US President Donald Trump refused to certify Iran’s compliance over a nuclear deal, leaving Congress 60 days to decide further action against Tehran. During the previous round of sanctions against Iran, some 1 million bpd of oil was cut from global markets.

Gulf Coast refineries back to normal

Refinery runs along the Gulf Coast averaged 8.8 million barrels per day for the week ending on October 20, or about 324,000 bpd higher than the five-year average, according to the EIA. Refinery runs had been down by 3.2 mb/d, or 34 percent, in the immediate aftermath of Hurricane Harvey. Two months on from the devastating storm, things are nearly back to normal.

Reconsidering Nigeria, Libya exemptions

Between Nigeria and Libya, their combined production in September was 690,000 b/d above December’s level, the last month before the output cut agreement went into force, undoing much of OPEC’s collective supply reductions.

Nigeria and Libya were allowed to remain free from production quotas, as they dealt with internal strife. However, some members of OPEC are now harping that the exemptions of Libya and Nigeria may need to be addressed, with some ministers saying that the two countries have recovered sufficiently to join in the production cut efforts.

Ibe Kachikwu, minister of state for petroleum resources said at an industry conference in Cape Town Nigeria would not hit its maximum production capacity of 1.8 million b/d which he said amounts to its ceiling under the OPEC/non-OPEC deal until early 2018.

Libyan officials have said their country’s recovery remains extremely fragile, with fields still vulnerable to shut-ins due to militant blockades. Libya’s National Oil Company lifted the force majeure on production from its key 300,000 b/d Sharara field in early October, after a three day closure.

Mohammed Barkindo, OPEC secretary general said the two countries’ participation in the output cut agreement would be considered in due time.

FRANK UZUEGBUNAM

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