All the analysts we spoke to agree that ramping of U.S. energy production has changed the global energy dynamics dramatically. Which begs the question, if we’re swimming in oil, why is crude still above $100?
There are supply reasons why crude has clung to the $100 level, and the threat of a military strike on Syria in early September and potential retaliation is what took it from $100 to $110.
“Crude oil is stuck in the Syrian news cycle right now,” Chirichella says. “Once it is over, whether the U.S. is going to bomb them or not bomb them, I don’t anticipate any impact on the flow of oil. The Syrian risk premium in the market will work its way out.”
Most analysts peg the Syrian risk premium at roughly $10, and that is based on fear of retaliation as Syria is not a big producer of oil. “If you actually see an attack on Syria, crude will spike up another $5 and then immediately reverse,” Flynn says. “You will see an impact on demand; you will see a release of oil from the global Strategic Petroleum Reserves (SPR). There will be a flood of oil and then the market will top out unless World War III breaks out.”
While the Syrian situation presents a risk premium, what has kept crude oil prices stubbornly high throughout 2013 is real supply fundamentals. “The underlying supply situation is relatively tight,” Chirichella says. “There are lots of problems. Libya is down to 150,000 barrels a day from 1.6 million; Iran is down to 1 million barrels a day; Iraq has problems, they keep blowing up the pipeline going into Turkey. North Sea is still under maintenance. The latest number that the EIA (Energy Information Administration) came out with in August estimates that we are running about 3 million barrels a day lower on global supply.”
Another pressure point on supply is Japan because it had to replace nearly all of its nuclear power production. “[Japan has] to replace that with something. It is either coming from [liquefied natural gas (LNG)] or it is coming from fuel oil,” says T.J. Sattler, portfolio manager at Treasury Management Services Trading. “[Japan is] a huge buyer of fuel oil right now. That has put pressure on crude. A majority of the LNG [it is] buying is based off of crude pricing. [Japan is] in a world of hurt.”
And who is to say what is normal these days? “If you look at normal demand patterns before the global economic crisis, the price of oil was going up about $10 per year, so with demand growth in emerging markets and the decrease in value of the dollar, $90 to $100 is where you would be at with normal demand growth,” Flynn says. He also notes that global quantitative easing and a weaker dollar also play into the price of crude.
Chirichella agrees. “The big robust revolution we are getting in the United States is being offset by a lot of those problems right now. Oil prices will come off, but I don’t think we are anywhere near a major collapse in prices until we see a recovery in some of these supply issues.”