Crude prices had their biggest two-day retreat since April in percentage terms through Thursday’s close. This came despite a fairly significant 700,000 barrel a day impact during the peak of the recent storm to U.S. Gulf of Mexico production. The interest-rate worries that dinged the Dow Jones Industrials for 1,377 points didn’t spare the world’s most important industrial commodity.
Yet Fed Chairman Jerome Powell’s long-term zeal for normalizing interest rates is no match at the moment for President Trump’s determination to punish major crude producer Iran. The shortfall of Iranian barrels has led some to predict that Brent crude, now just above $80 a barrel, could top $100 before the end of 2018.
The market isn’t tight everywhere, though. As evidenced by prices, there are localized gluts and producers who would gladly put more supply on the market if logistics would oblige. U.S. benchmark crude futures, priced at Cushing, Okla., are $9.00 a barrel below Brent and cash prices in the prolific Permian Basin are even cheaper. A lack of pipeline capacity is to blame.
None of that holds a candle to western Canada at the moment. Western Canada Select crude cash prices are now $46 a barrel below Brent. Pipeline and rail capacity already was stretched and, according to JBC Energy, a gas pipeline incident in the Pacific Northwest has worsened the situation significantly. Refineries in the region have had to scale back operations and thus crude purchases.
Economics of Offshore Drilling.
The economics of offshore drilling have deteriorated not just because oil prices remain lower than their previous peak, but because onshore shale production has become much more efficient, attracting more capital. At the same time, the offshore drilling-rig market remains oversupplied, particularly when it comes to less modern rigs. Utilization globally went from nearly 90% in 2014 to barely half last year and is a little over 60% now.