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US Supply, Global efforts Cushion Global Oil Markets after Weekend Attack - API

Gasoil News - Published on Wed, 18 Sep 2019

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An attack on a Saudi Arabian oil processing facility over the weekend has knocked out a significant part of Saudi production, at least temporarily, shaking oil markets. The precise amount and duration of the outage remains uncertain, and there are still unknowns about the attack that caused it, which in turn has inflated the risk premium on oil prices due to market fears about what may happen next within the region. The market’s initial direction is clear, with Brent crude oil up more than USD 8 per barrel. Let’s break down what’s happened in context, recognizing that the US energy revolution has fundamentally added to US and global near-term deliverability of oil, natural gas and natural gas liquids, generally helping stabilize the global market against supply disruptions. There is a long-standing and entrenched inverse relationship between oil spare production capacity and prices.

As one might expect with economic fundamentals, greater spare production capacity or market cushion historically has eased the market and corresponded with lower prices. Conversely, periods of lower spare production capacity historically have led to tighter markets and higher prices. The historical relationship that has shifted over time, before and after the US energy revolution. From 1990 until 2008, before major market effects of the then-nascent US energy revolution could take hold, there was a general pattern where lower OPEC spare capacity corresponded with higher prices, and vice versa.

This past weekend, the revelation that significant Saudi Arabian production capacity was lost was almost immediately offset in part by efforts to soothe global markets – first by the Saudis announcing they would bring additional offshore production capacity to market and second by the Trump Administration indicating it would release an undetermined amount of the US strategic petroleum reserve. Russia has reassured markets over inventories and supplies. Europe and China could follow suit and leverage their petroleum reserves. China, in particular, may need to resume purchases of U.S. crude oil that it stopped amid to the trade war with the US. That global oil consumers turn to the United States for reliable supplies is a significant development from the US energy revolution.

As API’s Monthly Statistical Report for August shows, US oil production set new records at 12.3 million barrels per day for crude oil and an additional 4.8 mb/d of natural gas liquids. For a second year in a row, the US has supplied virtually all global growth in oil demand and now can backstop global oil markets during a potential crisis.

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Posted By : Rabi Wangkhem on Wed, 18 Sep 2019
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