The price of U.S. crude fell sharply in the first week of August, making it the worst first week of any month for American oil in five years. West Texas Intermediate crude is 22 percent below the settlement high of $66 that it reached in April. Brent has dropped 24 percent since April as well. Technically, these price behaviors show that oil has already entered a bear phase. With an increase in inventory by 2.4 million barrels week-on-week in early August, prices seemingly have no reason to rise in the near future.
Yet there are many reasons to be hopeful. While some indicators point to falling prices, there are other factors at work that could counteract them.
Iran’s Oil Exports at an All-Time Low
The sanctions by the U.S. against Iran have meant that the country’s oil has essentially been taken off the global market. While the U.S. has aimed to get Iran’s exports down to zero, the country’s export capabilities have, in reality, been reduced to a small fraction of their previous level. In July, Iran’s oil exports were as meager as 100,000 bpd. Before the U.S. pulled out of the nuclear deal, Iran’s exports touched 2.5 million bpd.
Iran has attempted to sell oil to several countries on the sly, without reporting its export figures to OPEC. Iran is literally operating under the radar. Tankers filling up at Iranian ports switch off their tracking signal in order to escape detection.
With Iran unable to export its oil at levels previously seen, global oil supplies have fallen to a certain degree, ensuring some support for international oil prices.
U.S. Embargo Cripples Venezuela’s Ability to Sell Oil
It isn’t just Iran that has trouble exporting its oil. Venezuela’s oil exports, which account for 90 percent of the country’s ability to earn foreign currency, have been crippled by corruption and mismanagement. These problems have deepened ever since the U.S. imposed sanctions.
Venezuela loses foreign currency earnings worth $6 billion a year as a direct result of the sanctions. What little oil it does export, it transacts through Turkish banking intermediaries for payment. With a large quantity of Venezuelan oil taken off the world markets, oil prices have strengthened to a degree.
OPEC+ May Announce Deeper Production Cuts
Oil prices in the first week of August were the lowest that they had been in seven months. Around the same time, reports emerged that Saudi Arabia was convening with other OPEC+ members to further cut production in order to prop up prices. Should these planned production cuts come about, they will send prices up, at least in the short term. At the very least, OPEC+ is expected to extend production cuts at current levels to the end of the year 2020.
Optimism About U.S.-China Trade Relations
Oil prices rose in the third week of August, buoyed by optimism that trade tensions between the U.S. and China would ease, and other large economies of the world would take steps to keep a feared economic slowdown from occurring.
China has announced interest rate reforms that are expected to drive down the cost of corporate borrowing, and Germany has said that it is prepared to depart from its balanced budget policy and accept new debt to strengthen its economy.
According to Sigma Drilling Technologies, the suction stabilizer and dampener manufacturer supplying high-tech equipment to oil and gas drillers, a stronger economy translates to greater demand, owing to greater consumer and industrial activity. U.S. drillers have already turned the country into one of the world’s top oil exporters. With greater demand foreseen, U.S. drillers may soon see better times.
