Oil makes a break for the summit

Mosque in Iran © Alamy
Iran’s output will fall by more than 50% as a result of US sanctions

Oil prices reached four-year highs of around $80 this week. Traders braced for storms heading towards the US. Motorists filled up their tanks in anticipation, says the Financial Times. Oil-market experts were also monitoring any impact on supplies from the Colonial pipeline, a major conduit between the Gulf coast and the New York region.

This short-term squeeze on US supplies stands in stark contrast to the general trend of recent years. There has been a big jump in oil production over the past decade. In 2008, US oil output hit rock-bottom. America was pumping five million barrels of oil a day. Now, following the development of fracking technologies, the US is pumping more than 10.5 million barrels a day, according to the US Energy Information Administration (EIA). America has become the largest crude-oil producer in the world.

America’s gusher springs a leak

But while the EIA thinks US production will average 11.5 million barrels per day in 2019, this is lower than its earlier estimates. US oil producers “are losing their grip on their global crown”, reckons Lauren Silva Laughlin on Breakingviews. Fields in Texas were meant to make the country a bigger exporter of black gold than Saudi Arabia next year, but at present pipeline construction is delayed.

Meanwhile, though, others continue to make up for US shortfalls. Global supply reached a record 100 million barrels per day in August, according to the International Energy Agency (IEA), helped by Saudi pledges to hike output. For the moment, “traditional producers hold the whip hand”, says Silva Laughlin. Given this backdrop, it’s no wonder “prices beat a quick retreat” this week, “like mountain climbers spooked by the effects of a lack of oxygen”, says David Sheppard in the Financial Times.

And supply elsewhere is falling

But the fundamentals of the market “increasingly point to higher prices in the short term”. Concerns about a global supply shortfall are mounting. The IEA this week warned of a possible squeeze once the US re-imposes sanctions on Iran’s oil industry in November. As a result of the sanctions, Iranian oil exports are predicted to fall from 2.5 million barrels per day to one million, says Walter Schneider in Finanz und Wirtschaft. Meanwhile, the $80-a-barrel price level was one of the triggers last May for US president Donald Trump to call for Saudi Arabia and other major oil producers to add more supply to the market, says Sheppard, partly to compensate for the looming loss of Iranian output.

But there is little sign of much extra oil so far. As Venezuela’s output continues to decline, “Libya is teetering”. Together with slowing production growth in the US, this implies a 500,000 barrel a day shortfall in the market in the last three months of the year, according to the IEA. It’s hard to see scope for an oil-price crash any time soon. “Another attempt at $80 a barrel is due, predicts Sheppard. The summit… remains in sight.”