U.S. oil production is rapidly approaching oil production levels of that of Russia and Saudi Arabia.
With the shutdown of the Forties North Sea pipeline, a big chunk of the oil supply has been blocked from the market and along with the tightening OPEC-led production cuts, the oil market is witnessing a widening gap between supply and demand., As a result of these market forces, the price of Brent crude has shot up to levels above $65 per barrel, its first since 2015.
Brent crude futures LCOc1, the international benchmark for oil prices, were at $65.29 a barrel at 0253 GMT, up 60 cents, or 0.9%, from their last close.
U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $58.30 a barrel, up 31 cents, or 0.5%, from their last settlement.
“Brent crude raced higher … as news broke that the North Sea’s Forties Pipeline system would have to be shut down for a ‘number of weeks’ after a hairline crack was found in it,” said Jeffrey Halley, senior market analyst at futures brokerage OANDA. “The pipeline … is a significant component underpinning the Brent benchmark.”
On Monday, Forties oil pipeline, Britain’s largest, with a capacity of 450,000 barrels per day (bpd), shut down due to cracks.
“The market reaction shows that in a tight market, any supply issue will quickly be reflected in higher prices,” said ANZ bank.
Significantly, with the price of Brent crude shooting up, the market is seeing a widening of price premium to WTI prices to almost $7 a barrel, up from around $5 last week, which makes U.S. oil exports a more attractive proposition.
Even the cheaper WTI is a result of rising U.S. oil production which has risen by more than 15% since mid-2016 to 9.71 million bpd, levels not seen since the early 1970s.
Incidentally, rising U.S. oil production, not very far off from top producers such as Saudi Arabia and Russia, threatens to undermine efforts by OPEC and non-OPEC producers to support prices by cutting down on supplies.
The OPEC led oil alliance has stated it will continue to cut supplies through 2018, in order to contain the glut in the global oil pool.