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The oil market is changing. While demand continues to grow at a brisk pace, supplies reached a record 100 million barrels per day (BPD) in August, according to the latest oil market report from the International Atomic Energy Agency. energy (AIE). That's after Iraq delivered a record output as supplies from Libya rebounded. Because of this, there was more than enough oil to meet the needs of the market.
However, the IEA noted some concerns in its report, which suggested that the oil market could tighten in the coming months and push the crude even higher than its current threshold close to $ 80 per barrel for Brent, world reference oil. This has led the IEA to conclude that the oil market is entering a "crucial period" as it is unclear whether any other producers will be able to take over. If they can not, the oil could then skyrocket.
Source of the image: Getty Images.
Get down to the current situation
While global oil supplies surpassed 100 million barrels in August, there is some question as to whether producers can keep up. First of all, production in Venezuela remains in free fall. The IEA noted that production averaged 1.24 million BPD last month and could fall to 1 million BPD by the end of the year if it continues its current rate of decline . This is a steep drop for a country that has produced an average of 2.5 million BPD over the past decade. It's not as if Venezuela was running out of oil since it holds the biggest reserves of OPEC. Instead, the country can not afford to maintain production because of its current economic problems.
At the same time, Iran's oil exports began to fall in anticipation of the Trump administration's sanctions, which will come into effect in early November. Until now, Iranian exports are expected to fall by 500,000 BPD. According to some analysts, however, they could fall by 2.5 million BPD.
While OPEC has about 2.7 million BPD of unused capacity to fill the gaps, "it is unclear how far beyond what is generally considered" easy "to implement. line, will be available to coincide Venezuelan exports and a maximization of Iranian sanctions ", according to the IEA.AEA notes further that" if we are looking for additional barrels coming from elsewhere to help offset the decline exports from Venezuela and Iran, the situation is mixed. "In fact, Brazilian production has not increased as much as expected this year due to various problems.In the meantime, pipeline constraints slow production growth in the Permian Basin, which was the fastest growing oil region in the world.This issue will probably not be expected until the end of next year, when new pipelines should enter service.
Source of the image: Getty Images.
What does it mean for the oil market
These factors led the IEA to conclude that "we are entering a crucial period for the oil market". Not only could the situation in Venezuela deteriorate more quickly given its economic problems, but the conflicts could return to Libya and reverse some of its off-line production, as the deadline for Iran approaches to big steps. For this reason, the price range of $ 70 to $ 80 a barrel for Brent "could be tested" because "things are getting tighter".
While rising oil prices would be detrimental to oil consumers, it would benefit oil producers, especially those who can capture Brent prices, which are currently $ 10 a barrel higher than West Texas Intermediate (WTI). ). Multinational oil companies like ConocoPhillips (NYSE: COP) and Chevron (NYSE: CVX) would be among those who benefit the most. In the case of ConocoPhillips, each change of $ 1 per barrel in the price of Brent would increase its cash flow from $ 105 million to $ 125 million over the course of a year, whereas this increase would only result in an increase of $ 25 million. improve cash flow by $ 45. at $ 55 million. Meanwhile, Chevron produces an average of 575,000 BPDs of oil and other liquids in the United States, allowing them to achieve WTI-based prices while obtaining nearly 1.2 million BPDs in countries around the world. who capture Brent prices. Because of their higher weighting to Brent, Chevron and ConocoPhillips would earn more money per barrel if world oil prices rose as a result of supply problems in Venezuela and Iran.
Global oil producers could become winners
The oil market could be very volatile in the coming months. If Venezuela's production continues to fall and supplies from Iran decline due to sanctions, the price of Brent could exceed $ 80 per barrel. That would be great news for oil producers like ConocoPhillips and Chevron, who are selling more of their oil at Brent-based prices, which could give their stocks more energy to outperform their rivals in the coming months. come.
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