Struggling oil prices calls for deeper, longer OPEC cuts
The clearest indication of how badly oil prices are faring is that even with Hurricane Harvey cutting 25 percent of US energy production, oil prices still struggle to rally to $55 per barrel.
As the skies clear over the West coast of the United States, the world’s biggest shale oil producer count losses from a natural disaster that saw outages of refineries and pipelines. Motiva, which runs the US largest refinery in Port Arthur, began to completely shut down its 600,000 bpd facility last Wednesday over rising flood waters.
Investment firm Goldman Sachs said the refinery shut downs, as of August 30, have spiked to 3.9 million barrels per day (mb/d), although upstream oil production outages have dropped below 1 mb/d. More ports were closed – in addition to Corpus Christi and Houston, the ports of Lake Charles, Beaumont, and Port Arthur have shut down.
These outages, the investment bank says, will mean that the “ongoing recovery in production will only be partial.” The refinery and pipeline closures are “leaving the oil market long 1.9 mb/d of crude vs. last Thursday, short 1.1 mb/d for gasoline and 0.8 mb/d for distillate.”
Goldman speculates that about 10 percent of the 4 mb/d of refining capacity that has been disrupted will remain offline for several months.
Disruption of US refining capacity has failed to translate to higher crude oil prices because refiners forced to shut down are no longer buying crude oil. More worrying is that the recovery might not be quick. While most refineries had controlled shut downs, there are quite a few, especially in the Port Arthur region, that have been inundated with water, which means that the damage to them is still unknown.
This is raising calls by some that the OPEC deal to cut oil production should be extended by late 2018. Thomas Pugh, commodities economist at British economic research and consulting company Capital Economics told online journal Trend that OPEC cuts would need to go deeper.
Saudi Arabia and Russia proposed to extend the OPEC deal until June 2018.
“I don’t think extending it to June will be enough to do much. They would have to extend it until the end of 2018 in order to make any sort of difference,” said the expert.
Pugh believes that even then an extension of the deal could just encourage US shale production to grow by even more.
“I’m also not convinced that the deal will be extended as countries like Iraq are still not complying,” he added.
There are calls for Nigeria and Libya to join the cuts as a bearish oil market looks to extend beyond 2017 and hopes for recovery in early 2018 looks illusory.
“We expect it to put some short-term downward pressure on prices, especially on West Texas Intermediate (WTI). It will also put upward pressure on gasoline prices, driving crack spreads higher,” said Pugh. “Not only will OPEC have to extend its deal forever, it will have to keep deepening the cuts, eventually the pain would be too much and the group will return to full production. This is exactly what happened in the 70’s and is a key reason why we are skeptical that OPEC will continue to extend the deal.”
On May 25, OPEC member countries and non-OPEC parties, Azerbaijan, Kingdom of Bahrain, Brunei Darussalam, Kazakhstan, Malaysia, Mexico, Sultanate of Oman, the Russian Federation, Republic of Sudan, and the Republic of South Sudan agreed to extend the production adjustments for a further period of nine months, with effect from July 1, 2017.
ISAAC ANYAOGU