Oil Prices Are Too High

Irving Hamilton
June 14, 2018

Prices were pulled down by another rise in USA oil production C-OUT-T-EIA, which hit a weekly record of 10.9 million barrels per day (bpd) last week, according to the Energy Information Administration (EIA) on Wednesday. Crude oil output was nonetheless down 610,000 bpd on 2017 due to Venezuela's sharp decline.

Earlier in the session, Brent and USA crude had retreated on concerns about rising production in the United States and expectations that OPEC and other producers could relax voluntary output cuts.

Brent crude was up 53 cents at $76.41 a barrel by 10:52 a.m. EDT (1552 GMT). The country boosted production after the USA lifted sanctions related to Iran's nuclear program in 2016, but analysts expect output to fall when the Trump administration's decision to withdraw from the deal takes full effect later this year.

Crude stockpiles fell by 4.1 million, and gasoline supplies fell by 2.3 million barrels, the Energy Information Administration said.

The president has been vocal about his dissatisfaction with oil prices in the past. "Put the exports of crude on top of that, and it's just a really bullish report". "It seems like we need nearly every barrel of that to keep up with this refining demand".

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India and China, which together accounted for nearly 17% of world oil consumption past year, are working on combining their shopping carts with a view to challenging Opec's capability to play havoc with crude prices and seek better bargains from the cartel of oil exporting countries, especially its West Asian members.

Some countries have already increased production, and analysts have said the outlook for the oil market for the rest of 2018 is uncertain as OPEC countries prepare to meet June 22-23 in Vienna to discuss output.

US bank Morgan Stanley said OPEC and its partners had "largely achieved their stated objective of rebalancing the oil market". The group is also contending with internal differences: Saudi Arabia favors easing output curbs implemented a year ago after they succeeded in shrinking a global glut, while Iran, Iraq and Venezuela oppose boosting production. "Unofficial sources have said Russian Federation will propose to return production back to the October 2016 (level), i.e. removing the cap altogether over a period of three months". While OPEC countries are still the dominant suppliers to Asia, nearly all big importers in the region have increasingly turned to USA crude after a four-decade ban on American exports was lifted in late 2015.

For 2019, IEA's estimate of demand anticipates growth of 1.4 million barrels of oil per day, amid a boost from the petrochemicals sector, where some projects are coming on stream earlier than previously thought.

"Prices are unlikely to increase as sharply as they did from mid-2017 onwards and thus the dampening effect on demand will be reduced", the IEA said in its latest monthly report.

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