Complex Made Simple

The oil price dynamics lies with OPEC, shale, Trump, China and Aramco

The mystery is lifted as to what is driving oil prices

Libya’s largest oil field, Sharara, which 300,000 bpd output has been shut since December, is now restarting U.S. shale continues to grow at a brisk rate, with production at 12.1 million barrels per day (mb/d), up nearly 600,000 bpd from October levels Saudi Aramco is working on gasoline compression ignition which mixes fuel and air more effectively prior to combustion

When it comes to the engines driving oil prices, it’s really a simple equation.

5 main players are playing piano notes but in a cacophony of sounds that often don’t make sense. But it does.

Here’s how the oil picture is playing out.

OPEC

In an attempt to increase the price of oil from a current Brent at $65.7, the OPEC+ has taken more than 1.2 million bpd (mbpd) offline, and Saudi Arabia is going further, aiming to lower its output to 9.8 mbpd by this month, or 0.5 mbpd below its required ceiling, according to OilPrice.com

The coalition is likely to defer a major policy decision until its June meeting in Vienna. Sources told Reuters that an extension of the production cuts is likely, with some experts hinting at deeper cuts. 

But even OPEC+ cuts are weakened when certain oil fields are reactivated. Libya’s largest oil field, Sharara, which 300,000 bpd output has been shut since December, is now restarting, adding to bearish oil prices.

According to Investing.com, New York-based research company Energy Intelligence summed the situation when it said: “OPEC must contend with significant factors outside its control that could disrupt its best-laid plans.”

These include a global macroeconomic deterioration led by China or a trade war with the US and is precisely what’s keeping US crude from reaching its next target of $60 per barrel and Brent the expected $70 mark.

US oil 

CNBC said bullish output forecasts by two big U.S. producers and a build in weekly U.S. crude stockpiles outweighed ongoing OPEC-led production cuts.

U.S. shale continues to grow at a brisk rate, with production at 12.1 million barrels per day (mb/d), up nearly 600,000 bpd from October levels. The EIA recently revised up its forecast for US production to 12.4 mbpd this year, up from the previous 12.1 mbpd it had expected for 2019.
 U.S. crude inventories rose by 7.3 million barrels in the week ending March 1 to 451.5 million, compared with analysts' expectations for an increase of 1.2 million barrels, API said.

All of this has translated into a price gap between Brent and WTI widening to $10 per barrel, up from a $6 to $8 range in January 2019.

China Trump

US President Donald Trump says he is optimistic that a landmark trade deal with China is close. Chinese officials are not so sure, according to the New York Times.

 “The American negotiating team has signaled that it will lift 10% tariffs on roughly $200 billion of Chinese goods that Mr. Trump imposed last autumn, people familiar with the discussions said. But the fate of 25% tariffs imposed last summer on an additional $50 billion of goods is less clear, said the New York Times. 

According to Forbes U.S. exports of oil to China totalled a record $1 billion last June, and China ranked second only to Canada as a purchaser of U.S. oil. In August, 2018, that total dropped to zero and remained there for September and October as well.

Oil prices tumbled more than 3% on Monday, February 26 this year when Trump publicly urged OPEC to lower the cost of crude, which at the time was trading at about a $1 than today’s prices.

Aramco

More efficient fuels and more sophisticated combustion engines are needed to bring down carbon dioxide pollution and to secure the long-term future of Saudi Aramco’s business, Ahmad Al Khowaiter, Chief Technology Officer at Saudi Aramco said recently.

In a push to extend the life of oil as fuel to car producers who have their hands on the EV button, Khowaiter told journalists at the Geneva car show “Improving combustion engines is key to sustaining our business in the long term.”

“We can now optimize the fuel and the engine at the same time. And we can bring it to market by adding another fuel pump at the gas station, just like it is done with higher octane fuels,” Al Khowaiter said.

Saudi Aramco is working on gasoline compression ignition which mixes fuel and air more effectively prior to combustion, resulting in lower nitrogen oxide and soot emissions and a 30% improvement in fuel economy.

The petrochemicals giant is also helping to develop mobile carbon capture technologies which could be built into next generation passenger cars for around $1,400 per vehicle, and help to cut carbon dioxide emissions.