Oil prices opened a bit lower this morning. But the price of oil remained mostly steady this week, as record levels of U.S. oil production offset declining inventories.
However, there are several factors brewing in the oil pot that could send prices higher in 4Q. A coming “peak” in American crude output, increasing global demand, and geopolitical fallout from Washington’s sanctions against Iranian oil importers all hint at a fourth quarter rally in oil.
Investors should prepare.
According to the latest EIA report, U.S. oil inventories fell to 401 million barrels at the end of August. This is the lowest they’ve been since February 2015.
U.S. oil inventories have been declining for several months. And falling inventories have been a significant driver of prices. However, price increases due to lower stockpiles have been somewhat mitigated by an increase from America’s crude producers.
U.S. crude output stands at a historic record of 11 million barrels per day, a level it has been around for most of the summer. The previous record in U.S. crude production was made in the early 1970s.
American oil output has actually been increasing for a few years now as a result of new production techniques, particularly fracking.
But while the U.S. now enjoys status as one of the world’s largest oil producers, it’s important to remember these increases in U.S. crude production are ultimately limited. Nothing lasts forever.
And American oil production may soon be reaching those limits (if it hasn’t already) due to the drastic decrease in exploration and development CAPEX from the oil industry beginning back in 2014.
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It’s impossible to predict when it will happen, but a “peak” in U.S. oil production will most certainly serve as good media fodder and lift crude prices nicely.
Meanwhile, world demand may be increasing faster than expected.
According to OPEC’s Secretary General, global oil consumption will hit 100 million barrels per day this year.
Mohammed Barkindo told an energy conference in South Africa’s Cape Town:
The world will attain the 100 million barrels a day mark of consumption later this year, much sooner than we all earlier projected. Therefore stabilizing forces which create conditions conducive to attracting investments are essential.
The 100 million barrel level is a very important psychological mark for global oil demand. It’s easy to remember and be repeated. And it will also most certainly serve as great media fodder and will very likely prompt a good rally in oil prices.
But the big story that will affect oil prices in 4Q is still Washington’s sanctions against Iranian oil importers.
Last month, President Trump signed a new executive order that gives countries a drawdown period until November 5th to stop importing oil from Iran or face sanctions from the U.S.
That November date is closing in, just a few weeks away now.
Iran is a major oil exporter, one of the largest in the world. Iranian oil supply cuts alone could dramatically affect crude prices. But the geopolitical fallout from these sanctions almost promises to drive oil prices higher.
The fourth quarter of the year seems very nicely set up for a rally in oil prices.
Investors and traders should be prepared.
Until next time,
Luke Burgess
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
