The energy industry is a multifactor industry that is not only affected by the performance of the many companies within it, but the price of the commodity that is used by these companies. The global benchmark for oil trading is Brent Crude, and the U.S. benchmark is West Texas Intermediate.
The prices of Brent and WTI have rallied since the crash to $30 a barrel but have recently undergone some strain. The rally was in part due to OPEC’s de facto leader Saudi Arabia working with Russia to enact supply cuts.
That combined with geo-political tensions — including the death of Jamal Khashoggi at a Saudi Arabian embassy in Turkey and sanctions announced on March 12 on Iran, which exports nearly 3.5 million barrels per day — have brought oil futures to new four-year highs.
Oil demand is strongly correlated to gross domestic product, and it is inferred that as GDP increases, output is increased, meaning a need for oil. The GDP is globally threatened specifically with South Korean GDP, only expanding by 0.6 percent missing the expected 0.7 percent for third quarter.
Slowdown of the global economy has sent shocks to the price of oil. From the beginning of October, Brent is down 10.71 percent and WTI is down 12.48 percent. With the Federal Reserve set to raise interest rates again in December and plans for three more hikes next year, the decade-long bull run may be slowing down. There is also a rise in the U.S. dollar index of 1.44 percent, hurting the demand for dollar that denominated oil futures.
Recently, Russia has weaned off its supply cuts and has no intention of slowing output levels over fear of undersupply combined with China and India trying to circumvent U.S. sanctions on Iran allowing for higher oil supply and hurting futures.
The United States has had a surge in oil production because of its ability to frack. This allows the country to drill multiple wells horizontally instead of one well vertically, allowing for more oil production per well. Allowing the United States to surpass Russia, as the largest oil producing nation. The biggest area for this is the Permian Basin, an oil field in West Texas, second only to the Ghawar Field in Saudi Arabia in production.
This has come with some issues. The Permian Basin’s rapid increase of oil production to 3.5 barrels per day was not accompanied by an increase in capacity from oil pipelines, which move oil to refineries to be turned into usable products.
This has caused a supply glut in the Permian Basin forcing upstream or Exploration and Production companies to sell their oil at a discount or transport it by rail, which hurts earnings.
Refineries benefit from this by acquiring oil at a discount, boosting earnings. Refineries in the northern United States currently receive oil at a discount from Canada. Canada is a large oil-producing nation that does not have enough refineries. Drillers there sell their oil at huge discounts currently around 60 percent to American refineries.
By Anqin Chen, Nikhil Kumar and Liam Minerva