Crude prices trapped by increasing supply

The spread between WTI and Brent has narrowed for most of this year. However, the recent news that the Keystone pipeline will soon start has caused WTI to jump, widening the spread.

The widening of the spread is likely to be a short-term fillip, as improvements in the transportation networks are being made. Previously, the logistic problems with moving crude out of Cushing caused a glut in inventory. The pipeline in the southern part of Keystone is expected to increase the volume of production to 700,000 barrels a day, reducing the supply glut.

Shale production has provided an economic boost to the US and changed the landscape of the international energy markets. The shale revolution is at the beginning and yet it has increased US production of oil to 3.2 m barrels per day (bpd), snagging the top spot as the world’s biggest oil producer, according to PIRA. However, the US still lags behind Russia and Saudi Arabia on crude oil production.

The OPEC meeting that took place yesterday has agreed to keep the production target at 30million bpd to keep prices at stable levels. Over the past three years, WTI has averaged at $95 per barrel and Brent at $116 per barrel. The cartel’s pledge was not a surprise, which adds to the sense that the effectiveness of the group is waning.

The possible increasing supply from countries such as Iran, Libya and the US means the group needs to cut-down production to keep prices stable. It is unlikely these individual countries will reduce production. The Iranian Oil Minister, Bijan Namdar Zanganeh, has said they will produce up to four million bpd, even if crude prices goes down to $20 per barrel. On the other hand, Iraq won’t cut output, said Iraq Oil Minister Abdul Kareem al-Luaibi.

Geopolitical risks remain with other OPEC member’s such as Libya, Nigeria and Venezuela. Even if OPEC members reduce crude production, non-OPEC members will increase their production. WTI and Brent’s recent rally is likely to remain short-term and trading is likely to be range bound.

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