As if signalling how it will behave in 2018, oil prices went up to new highs this year, following a couple of incidents that are causing temporary supply outage.
These things do affect market reactions, but only when reserves are low, and for all intended purposes they are not, else OPEC and allies would not be under self imposed cuts till end 2018.
That timeline looks to be nearer to mid-2018 according to Goldman Sachs and accelerating OPEC’s exit from the production cut pact.
But why are markets so jittery?
Oil rallies and settles
Reuters reported that oil prices settled on December 27, as a rally fizzled a session after crude hit a near 2-1/2-year high resulting from supply outages in Libya and the North Sea.
“Brent crude futures settled at $66.44 a barrel, down 0.9%, or 58 cents. U.S. West Texas Intermediate (WTI) crude futures settled at $59.64 a barrel, down 33 cents, or 0.6%,” said Reuters.
The previous day, Brent went over $67 for the first time since June 2015 and WTI rose above $60 a barrel, again a first since May 2015.
“On Tuesday, Libya lost around 90,000 barrels per day (bpd) of crude oil supplies after a pipeline feeding Es Sider port was blown up. Repairs could take a week but will not have a major impact on exports,” the head of Libyan state oil firm NOC told Reuters on Wednesday.
According to S&P Global Platts, NOC expects a reduction in production of 70,000 to 100,000 barrels a day.
Libya pumps 1 million barrels per day from less than half of that a little more than a year ago.
Britain’s partial closure of the Forties pipeline further disrupted supply.
On Wednesday, Forties was pumping at half its normal capacity and resumption of normal 400,000 bpd flows will restart in early January.
Together, the incidents pulled 500,000 bpd from the market, a half a percent from a global supply market of about 100 million bpd.
“While supply impact is immaterial, it shows that with the market structurally undersupplied and inventories continuing to draw, geopolitical risk has now re-emerged as an important factor in day-to-day trading dynamics,” analysts at Tudor Pickering Holt Energy Research said in a note.
Psychology of oil prices
The amount of supply knocked offline in Libya is about equivalent to the volume added to the global market from U.S. shale in just the past few weeks.
U.S. oil production has soared more than 16% since mid-2016 and is approaching 10 million bpd.
OilPrice.com said that despite the U.S. adding supply in such a short amount of time, prices have posted gains since the start of December.
“The markets have priced in gains from shale, but they haven’t priced in unexpected outages,” it said.
“The market jitters are magnified by the fact that the oil market is a lot tighter than it used to be with inventories having dramatically declined to roughly 100 million barrels above the five-year average, less than a third of the peak surplus the market saw last year.”
Michael Wittner, global head of oil research at Société Générale, recently told the Wall Street Journal (WSJ) “Oil markets got a real big reminder of all the different things that can and will drive prices—from investor flows to geopolitics to unplanned disruptions pipelines and refineries.”
One of the biggest investment banks is one of the most bullish voices in predicting the state of the oil market next year.
“The oil re-balancing continued its progress through November,” thanks to factors including “stellar” oil demand growth, Goldman Sachs analysts said in a note this week, as carried by Bloomberg.