The price of crude oil continued the gaining streak after data from the Energy Information Administration (EIA) showed reduced stockpiles. The data released yesterday showed that the amount of crude oil in storage declined by 5.8 million barrels. This was higher than the 2 million drop analysts were forecasting. It was also higher than the 5.2 million barrels that the American Petroleum Institute (API) had reported on Tuesday.
Crude oil prices have been volatile in the past few months because of the geopolitical uncertainties. First, the US has increased its production in the past few years and has become the largest exporter of crude oil. Every day, the country produces more than 10.3 million barrels of oil. This has changed the paradigm in the oil markets, where the US used to depend on rival countries in the Middle East for crude.
Second, a few months ago, the Trump administration announced that it would exit the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran deal. By announcing its exit, the country announced that it would reimpose sanctions on the country. Some of these sanctions kicked off late last month and more sanctions on oil will come in November. Yesterday, John Bolton announced that the US will offer little wavers for companies doing business in Iran. As a measure of defiance, Iran announced that it would block other gulf exporters from accessing its waters. In recent days, the country has deployed ships in the region, signifying that a major disruption could happen.
On these sanctions, Iran faces a major challenge. It will be impossible for oil and gas companies to continue doing business there because of their exposure to the United States. This applies to the small companies that don’t do business with the United States. This is because no major bank will want to do business with them because of the fear of US sanctions. Already, the US has issued fines worth billions of dollars for companies violating its sanctions. In addition, these companies will not be able to buy good machinery and parts, which are mostly manufactured by American firms.
Third, there are concerns about OPEC and the amount of crude oil being supplied. Two months ago, the US president talked to the Saudi Arabian king and asked for a boost in production. This was in a bid to lower the prices, which had reached above $80 for the global benchmark. Recent data suggest that Saudi has not had major increases in supply.
There is also the uncertainty about the Middle East and global growth. In recent days, Turkey has been in trouble as its inflation rate jumps. There are tensions between Qatar and Saudi Arabia and the crisis in Yemen and Syria is not ending soon.
Brent crude has reached $74.61 while the light and sweet WTI reached $68. These are the highest levels in two weeks. In the coming days, the price could continue to move up, but traders need to also focus on the downside risks.
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