The price of crude oil is rising and supply constraints are likely to appear

Crude oil has been in shambles since the beginning of 2019. Like most badets, crude oil was sold in the last quarter of 2018, when a furious wave of liquidation hit almost every market in the world. This trend reversed, with WTI rising by around 40% in 2019 and an increase of more than 30% for Brent.

Unlike global equity gains, rising oil prices are beginning to hurt consumers and businesses. People have to pay for refined products from crude oil, which puts pressure on just about everyone in the economy.

France has seen wild riots that started with fuel taxes, and US producer prices rose sharply earlier this week. The increase in the US PPI has been fueled by energy prices, which may not be a very good thing for companies facing a clbad of consumers in decay.

In the longer term, it is possible that crude oil supplies will undergo a structural change

Many of the largest oil producers in the world are struggling with social unrest, economic hardship or both. American shale oil has balanced these supply problems, but it may not be as reliable a source of crude oil as is widely expected in the oil industry.

The crude oil market is complex

The vast majority of countries consume or produce crude oil. Over the past decade, this dynamic has reversed with the introduction of American shale oil into the global energy mix. The recovery of shale oil has been controversial, but it has added a huge amount of supply to the crude oil market.

From the perspective of countries like Saudi Arabia and Russia, American shale oil is a real problem. American producers of shale oil have surpbaded both countries. Today, the United States is the world's leading producer of oil, which would have been hard to imagine 15 years ago.

Many OPEC member countries have to keep oil prices at a given level in their national budgets, which is one of the reasons they coordinate their production in order to influence the price. world oil. Although Russia is not a member of OPEC, it is working with the cartel to drive up oil prices.

OPEC + Cups

As crude oil prices rose at the end of 2018, OPEC was organizing production cuts to raise the price of oil. These cuts are beginning to hit the world price of crude oil and probably explain why WTI and Brent have rallied so quickly this year.

OPEC + (the "+" represents the largest oil-producing countries, Russia, Mexico and Kazakhstan being the largest) decided to continue production cuts, despite rising prices. Many of its members have suffered from lower crude oil prices and do not seem in a hurry to flood the market with additional products.

The Saudi situation

Every time OPEC begins to reduce production, it is always difficult to know which countries are following the cartel's instructions. This time, it looks like Saudi Arabia is honest and has withdrawn a substantial amount of oil from the global market.

The kingdom must increase its national revenues because it has an extensive social infrastructure supported almost exclusively by the sale of crude oil. The decline in oil prices means less money to spend to pacify its population and to arm itself so that it can continue to be the dominant military force in the Arabian Peninsula.

Unless oil prices are soaring, Saudi Arabia is unlikely to push OPEC + to increase production. All players in the oil sector know that American shale producers will not be able to maintain production at current levels. It is therefore logical to wait for the American shale to crumble.

Venezuela is a basket affair

Venezuela has been hit by two major problems. While the South American nation may have the largest oil reserves in the world, its crude oil production is declining. Add to that the recent American sanctions, and it is easy to understand why the oil market seems ever more tense.

President Maduro's predecessor, Hugo Chavez, embarked on a nationalization program in Venezuela, which destroyed the nation's ability to provide for itself. Unlike other crude oil deposits, the Orinoco Belt in Venezuela contains heavy and acidic crude oil. The exploitation and refining of this type of deposit requires a lot of know-how, which means that foreign companies must be present to do the work.

Given Venezuela's financial situation and its "respect" for private property, there will probably be no increase in production so soon. If the political situation in Venezuela continues to deteriorate, the specter of a total collapse of the country's crude oil exports could become reality.

Libya is terrible

Until NATO removed Gaddafi's regime from power, Libya was a stable oil producer, mainly for the European market.

Since the invasion, Libyan oil production has been unpredictable, as the country has not been able to regain its political position. Now, there could be another major military event led by Khalifa Haftar and his Libyan National Army (LNA).

At this point, Marshal Haftar and the LNA control most of Libya and are trying to take Tripoli. Haftar does not have much support from the international community, with the exception of Russia, France and the United Arab Emirates.

The end result of all this is a big unknown for the oil market, but it would be unlikely that Haftar would be allowed to usurp the power of the UN-backed government in Tripoli without heavy sanctions from the United States , United Kingdom and EU crude oil exports. In one way or another, Libyan exports of crude are much more likely to decline than to increase, at least for the foreseeable future.

The Algerian Wild Card

Algeria does not often make headlines, but a major change is underway in this country of North Africa. Former Algerian President Abdelaziz Bouteflika was fired from power earlier this month and there is little information on what could happen. Bouteflika had been in power since 1999.

Mbadive demonstrations took place in Algeria for months, even though they were completely illegal. Now, the protesters see Bouteflika's withdrawal as an opportunity to take a stand for an increase in human rights, which may not be what the Algerian power structure has in mind.

It is impossible to say what will happen next, but the possibility of a break in supply from the country is very real. At the end of last month, the IEA said that the political turmoil had not affected oil production in Algeria, but that could change at any time due to the formation of a new process policy.

Demand growth is concentrated but stable

According to the latest IEA report, oil demand is expected to increase over the next two years, but at a slower pace. The agency estimates that slower economic growth in China could lower crude oil demand by 30,000 barrels a day for the rest of the year, leaving demand at 1.21 million barrels per day. day for the rest of 2019.

The slowdown in Asian growth could in particular lead to a sharp drop in demand in the world oil market. The additional demand is largely driven by growth in China, India or some other part of Asia.

Chinese growth figures have been revised downward in recent months, but many economic indicators give a confused view of what is really happening in the world's second-largest economy. In the current state of affairs, the demand for oil continues to grow. A tighter crude oil market will likely maintain a floor below price, or even push it higher.

Crude oil does not give a good image to global consumers

It's no secret that the northern hemisphere tends to use more crude oil during the warmer months. This year, consumers will face higher gasoline prices and potential price spikes in the event of a sudden supply disruption leading to a substantial reduction in world market supply. crude oil.

In countries that use a lot of oil for their land transport, companies will see their margins decline if current trends in crude oil prices continue. In the short term, major oil producers like Saudi Arabia have the ability to increase production and keep the price of crude oil at reasonable levels. In the longer term, the American shale oil revolution could create an extremely difficult situation.

The main problem of shale oil, apart from the lack of profits, lies in the fact that shale oil holdings tend to produce the bulk of their oil initially. The rate of decline of shale oil wells is extremely high, meaning that American shale oil could leave the global oil mix as fast as it came.

Losing the world's largest producer of crude oil over the past decade is not used in future oil price projections. For the moment, it seems that global consumers will have access to abundant oil, even if the prices they pay may be on the rise.

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