WTI Crude oil prices staged a 23% rally from June 21st through September 25th. The rally appeared to be running out-of-steam as OPEC’s market monitoring committee met September 22nd and made no recommendation about continuing the production limits beyond March next year.
But on Monday, the 25th, there was a surprise announcement by the president of Turkey that he would block the Kurds’ crude oil exports through the pipeline that is on Turkish soil if Kurdistan becomes an independent state. The vote was imminent.
Crude prices rose 3% to the highest rate since May, blowing through technical resistance levels. No doubt there were stops at those levels that were hit, triggering more buying. In the CFTC Commitment of Traders report for the week of September 26th, most of the buying was indeed short-covering by specs and hedgers. A minority of the buying was new long speculative positions.
Articles appeared everywhere that oil prices enjoyed a “breakout,” and market pundits predicted oil prices would soon return to $70 or even $80 per barrel.
Would Turkey Really Block Kurdish Crude Oil Exports?
The Kurdistan region of Iraq currently produces around 650,000 barrels per day, of which 85% goes through the Turkish pipelines. “Entrance-exit will be closed" at the Khabur border crossing to the Kurdistan Region, Turkish President Recep Tayyip Erdogan said in a speech.
The threat was it would block the exports if they become an independent state. And so it is my view that they would not become independent unless they had a means of exporting oil since they need that to survive, and so no such block is imminent. They will negotiate some solution first.
I also note that Rosneft has invested more than $5 billion in the Kurdish region of Iraq, and so Russia has a vested interest. I believe the Kurds could get help from Russia with Turkey if they need it.
U.S. Oil Industry Being Restored
Another part of the narrative supporting oil prices was the disruption to the U.S. oil industry caused by the hurricanes and the drop in the oil-directed rig count. But in data released by the Energy Information Administration (EIA) for the week ending September 22nd, crude production was estimated at 9.547 million barrels per day (mmbd), up from pre-Harvey estimates.
The EIA also reported that U.S. refinery inputs of 16.174 mmbd, a recovery of one million barrels per day. EIA reported a similar recovery in the prior week. Depressed refinery runs had caused product stocks to drop, which had resulted in a spike in product prices, which also supported crude oil prices.
Crude oil inventories had reversed their summer draws due to the lower use at refineries. Crude stocks were most recently reported just one million barrels lower than last year.
On Friday, September 29th, the EIA released its monthly crude production 914 report for July. The data showed that U.S. crude production rose by 141,000 b/d in July to average 9.238 million barrels per day (mmbd). In the year-to-date through July, production rose at an 800,000 b/d annualized rate. This data rebuts the narrative that the crude production rate had underperformed expectations.
The largest increase was in the Gulf of Mexico (GOM), 127,000 b/d. Unscheduled maintenance had reduced production there for three months, causing U.S. output to look far below the weekly data series estimated by the EIA.
Finally, the U.S. rig count had begun to dip in mid-August, further reducing expectations of future production. But in the week ending September 29th, Baker-Hughes reported that oil-directed rigs rose by 6, reversing the downward trend.
Conclusions
The factors supporting the price rise since Hurricane Harvey, and the break-out this week, are unlikely to support a further price gain. On the contrary, I expect more bearish data to re-emerge.
Check back to see my next post!
Best,
Robert Boslego
INO.com Contributor - Energies
