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Strong demand and global crude oil supply disruptions support high oil prices

Hydrocarbon Engineering,

Brent crude oil spot prices have increased by as much as US$ 7/bbl (6%) since the chemical weapons incident in Syria on 21st August, 2013. However, market fundamentals have been moving Brent prices higher even earlier.

Brent crude oil spot prices increased almost US$ 15/bbl (15% from mid April to 20th August due to increasing refinery demand and record levels of unexpected crude oil production outages.

Global unplanned crude oil and liquid disruptions averaged 2.7 million bpd in August, the highest level over the period from January 2011 to August 2013.

Key producing countries experiencing sharp rises in oil supply disruptions are as follows:

  • Libya. Protests at a number of seaport facilities have blocked exports. As a result, crude oil supply disruptions have averaged close to 1 million bpd in August, up from 0.13 million bpd in April. Pipeline closures by militia groups at the end of August exacerbated the situation, with disruptions rising to 1.35 – 1.4 million bpd by the end of August.
  • Nigeria. Key pipeline disruptions in June helped to curtail almost 450 000 bpd of production, up 100 000 bpd compared to May. Production recovered to some extent by August when 290 000 bpd were off line.
  • Iraq. Persistent attacks on the pipeline from Kirkuk to Ceyhan in Turkey helped push disruptions of Iraqi crude oil production to 250 000 bpd in August, up 100 000 bpd from April. September maintenance at the Iraqi port of Basra could further reduce exports by several hundred thousand bpd. Although the Iraqi government has stated that exports will not be affected, a preliminary September loading schedule indicates a decline of several hundred thousand bpd.

Syria is not a key producing country and significant volumes of crude oil do not move through the country to reach global markets. Before the civil war began in 2011, Syria produced approximately 400 000 bpd of crude oil, and exported approximately 150 000 bpd, mostly to Europe.

Ongoing hostilities, which have significantly affected Syrian energy infrastructure, combined with stringent international sanctions on petroleum exports from the country, have now cut crude production by approximately 85%.

As a result, while the recent events in Syria have pushed Brent prices higher in concerns about wider geopolitical unrest in the Middle East, they have not reduced the physical flow of crude oil into the global market.

Concerns in regard to geopolitical unrest are likely to continue to affect crude prices. However, a number of other factors might act to put downward pressure on prices:

  • Seasonal demand patterns. Seasonally, global crude oil demand declines in September. The International Energy Agency (IEA) expects global crude runs to fall 2.1 million bpd in September from their July peak to 76.2 million bpd, and to fall an additional 0.3 million bpd in October.
  • Rising non-OPEC oil production. The EIA projects the non-OPEC liquid fuels production will increase almost 2 million bpd in 2013, with fourth quarter 2013 production 0.7 million bpd above the third quarter level. This will help to offset production disruptions elsewhere. Crude oil production in the US is forecast to account for approximately 40% of this growth.
  • Sustained Saudi output. The EIA expects that Saudi Arabia will maintain elevated crude oil production of almost 10 million bpd into autumn if high volumes of global production remain undisrupted. Saudi Arabian production usually experiences a seasonally decline at the end of the summer, falling in line with its declining domestic consumption, which peaks in the summer. Sustained production therefore provides greater volumes for export, partially offsetting disruptions elsewhere.

Adapted from a press release by Emma McAleavey.

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