Crude Economics
Why Today’s Oil Price Rebound Fizzled

Well this is something of a rarity in recent times: Brent crude hit $37 per barrel for the first time this year on growing concerns over supply disruptions in Iraqi Kurdistan and Nigeria. Reuters reports:

Pipeline outages in Iraq and Nigeria have removed more than 800,000 barrels of crude oil per day from the market for at least the next two weeks. The disruptions should offset recent increases to supply from Iran, analysts said [. . .]

Brent crude futures were trading at $35.12 a barrel, down 17 cents from their last close, but rose to $37 earlier in the session, the highest since Jan. 5. For the week, Brent was up about 7 percent.

That rebound was short-lived, however, as Brent has now settled back down at $35.19, and America’s West Texas Intermediate benchmark is actually down $.18 on the day. But while the price recovery didn’t last, this story does tell us something about the current market.

A supply loss of nearly one million barrels per day is no small thing, and yet in today’s market it doesn’t seem capable of spooking traders in any significant way. The world is awash in oil, and producers from small U.S. shale firms to OPEC’s petrostates are all keen on selling even more crude than they already are. As Iraq and Nigeria struggle to keep their own production going, suppliers elsewhere are keen to step in and snag any opening in the market.

That’s especially true for American shale producers, who have drilled but not yet fracked a huge backlog (also known as a “fracklog”) of wells, waiting for prices to creep back up before they start operations. This means that any sustained price rebound is going to induce a new flood of U.S. supplies—one of the reasons why OPEC hasn’t moved to reduce its own output.

Today’s rally was brief, in part because even a loss of about 850,000 barrels per day isn’t enough to erase the global glut. But even if it had kicked off a more serious uptick, U.S. shale would be there to bring it right back down again.

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