As we start the second quarter of the year, the strength in the oil price is holding well with Brent crude hitting above US$70 for the first time this year.
A combination of factors is driving the price and in Friday trading, Brent crude was still above US$69 with WTI close to US$63 a barrel.
Many analysts have been telling us for months that all crude is not created equally and the shortage of heavy crude is now a factor in global supply. While crude production remains healthy, the abundance of lighter oil, the “sweet” supply from shale, is not satisfying global demand.
The impact of US sanctions against Iran and Venezuela as well as the OPEC production cuts have meant a shortage of heavy to medium sour crude needed for current refinery configuration.
Geopolitics took centre stage again this week when the army commander of Eastern Libya, Khalifa Haftar, ordered troops to march on Tripoli. His advances were in vain as government troops prevented any attempts to seize the capital, but the standoff raises fears of a resurgence of violence in the country.
The UN Secretary General Antonio Guterres and his team is now involved, hoping to broker a peace deal. The internationally recognised government is currently in the Libyan capital, but conflict continues.
A note from Commerzbank said that any shortage of oil exports from Libya will impact the market and add pressure on Saudi Arabia to “open up the oil tap again, as it did in the autumn.”
Libya’s production is currently at about 1.2 million barrels a day.
The stand-off in Venezuela is also complicating the picture with US sanctions on the national oil company PDVSA preventing oil exports. Russian military personnel are already in place in the country with the Venezuelan government suggesting more may be arriving. This is not the news that will sit well with American lawmakers as the economic crisis in the country deepens.
The US economy appears to be in good shape with strength returning to the stock market and the employment figures making gains with 196,000 new jobs added in March. Trade talks with China and the US are looking more positive with President Donald Trump saying they were “very close” to making a deal. American oil production is currently at a record 12.2 million barrels a day, with stockpiles high according to the US Energy Information Administration.
The oil price has many elements in its favour this week but any increase will surely bring a response from the US and other consuming nations. Geopolitical tensions may escalate in the weeks ahead, but OPEC will stand firm on its production adjustment and continue to assess the needs of the market.