Oil prices have the potential to react strongly to supply disruptions because U.S. oil supply is below the five-year average. Crude prices surged to five-year highs after President Trump vowed to retaliate against Syria for a Chemical Weapons attack and taunted Russia about their threat to shoot down U.S. missiles if they were used against Syria. More buying came in after Saudi Arabia said they intercepted one missile and shot down 2 drones over Riyadh, allegedly fired by Iranian backed Houthi rebels in what could be a subtle message to Saudi Arabia to Iran from not get involved with a Syrian International collation attack.
Despite record shale and Gulf of Mexico oil production, the supply in inventory is under the 30-day demand cover, at 25.4 days. This allows for supply concerns if global supply is disrupted for any amount of time. Even after yesterday’s larger than expected +3.306-million-barrel crude build, overall supply is still tight, and I believe that the surprise increase in supply was based on factors such as a surge in U.S. oil imports and a freak drop in U.S. exports. The EIA reported that crude exports fell by a shocking 970,000 b/d while imports grew by a fantastic 752,000 barrel per day. Overall supply numbers are too close for comfort.
The Energy Information Administration reported that U.S. crude oil production in the Federal Gulf of Mexico (GOM) increased slightly in 2017, reaching 1.65 million b/d, the highest annual level on record. Although briefly hindered by platform outages and pipeline issues in December 2017, oil production in the GOM is expected to continue increasing in 2018 and 2019.
While the Trump Administration has shown their willingness to use the Strategic Petroleum Reserve as a buffer as they did after the rash of hurricanes we had last summer the market is still concerned, more than they would have been just a year ago, about a potential long-term disruption of supply. Shale producers can’t raise production quickly and The Gulf of Mexico is already exceeding expectations and that is why oil is acting so strong, even though it is unclear that an attack on Syria will disrupt any supply of oil at all.