by Ryan Ray
HOUSTON, Jan. 10 (Xinhua) -- In the past ten days, the United States and Iran have made Iraq the focus of the world, after both struck targets in Iraq. In response, crude oil prices moved up briefly and then returned to previous levels.
The rise and fall of prices demonstrated that crude oil remained more resilient than other goods. In the meantime, analysts said that there was no panic in the sector but there is an increasing vigilance of the possibility of a supply disruption.
Although crude oil prices are on an expected roller coaster these days, as of Friday, both West Texas Intermediate (WTI) and Brent were lower than they were on Jan. 1.
A quick recap of crude oil history may provide some clues into why the prices, despite the appearance of escalating tensions, are not still trending upward.
In September 2019, two facilities of Saudi Aramco, Saudi Arabia's national energy company, were attacked. This, of course, made prices rise. However, a quick survey of the spot oil price revealed that the uptick in prices was not a long-term trend.
PLENTY OF OIL
Oil prices, both WTI and Brent, were trading over U.S. 100 dollars per barrel in June 2014, before going into a tailspin, both dropping below 30 dollars per barrel in 2016. Despite prices never again reaching 100 dollars per barrel, the U.S. oil production has increased by over 50 percent since June 2014.
According to the American Petroleum Institute's latest report, the United States set a record of oil production in November at 12.8 million barrels per day.
Furthermore, the U.S. Energy Information Administration (EIA) released its "Weekly Petroleum Status Report" on Wednesday, showing that U.S. commercial crude oil inventories, excluding those in the Strategic Petroleum Reserve, increased by 1.2 million barrels from the previous week.
In its December Short-Term Energy Outlook, the EIA expected that Brent spot prices will be lower on average in 2020 than last year due to forecast of rising global oil inventories.
The EIA forecast that Brent spot prices will average 61 dollars per barrel in 2020, down from 64 dollars per barrel last year, while WTI prices are projected to average 5.5 dollars per barrel less than Brent prices in 2020.
Crude oil prices will be lower on average this year because of forecast rising global oil inventories, the EIA said in its Short-term Energy Outlook report released in December.
Oil production, especially in the United States, needs to slow down in order to support crude prices for a long term. This would happen in 2020.
According to Baker Hughes, a Houston-based oil services company, the U.S. rig count was down by 207 in 2019 from the previous year. The inventory of drilled but uncompleted wells, also known as DUCs, peaked in March and has reduced by 130 since January 2019.
Since there is a finite number of DUCs, U.S. crude oil production can stay high for a limited period without adding to the rig count again.
Also, OPEC has agreed to cut 500,000 barrels per day until at least March of this year. The cuts are likely to be extended till June if prices do not see much movement over the next few months.
WHAT'S NEXT?
Now, even with strong market fundamentals, an all-out war between the United States and Iran would send shock waves through the market. However, neither side appears really interested in that.
Analysts believed the most likely cause of long-term price increases may be an all-out war, saying if the United States decides to attack refining facilities in Iran or Iran attacks refiners in the surrounding area, this could move prices. However, that does not seem likely.
Despite a lot of talks from the U.S. administration, its responses to Iranian attacks have been modest.
Last year, U.S. President Donald Trump called off military strikes in retaliation against Iran, citing the potential casualties of the impending strikes. At this point, unless something drastic changes, it is hard to imagine an escalation from the United States in the short term.
David Blackmon, a SHALE magazine editor and Forbes contributor, said "the ongoing tension between the U.S. and Iran will have little if any long-term impact on crude prices, barring a major escalation. Given that such an escalation into open, general military engagement is not in either country's national interest, that seems highly unlikely."
If the United States is successful in getting multilateral sanctions on Iranian oil, the market might respond with more than a blip, analysts suggested.
