This last week we've seen a number of significant events in the oil industry. A tanker fire and oil spill off the coast of China, President Trump's decision to ban drilling off the coast of Florida, and oil prices have now risen to their highest level since 2014.
In the oil business it's easy to make links between different incidents and events. There's so much at stake in this industry, for companies and investors, that it can lead a degree of nervousness. However, many quickly dismiss these thoughts as paranoia. But in this case, can we see any links between these three events?
The Panama-registered Sanchi tanker was carrying 136,000 tonnes of Iranian light crude oil to South Korea when it collided, mid-ocean, with a Chinese cargo ship, the CF Crystal, carrying 64,000 tonnes of grain. Thirty-one sailors are missing. Oil is spilling from the ship and fire is raging out of control. If the ship can't be stabilised and a major spill occurs it could be the worst since the Exxon Valdez dumped its cargo into Prince William Sound, Alaska, in 1989. The environmental damage will be incalculable.
But what, if any, effect might this have on the price of oil? Right now it's hard to say long term. Immediately after the Deepwater Horizon (Macondo) disaster nothing much happened to prices. Then, to everyone's surprise, prices started to fall. This goes against all conventional wisdom. But it happens.
Meanwhile, hot on the heels of this incident, the Trump administration backtracked on its decision to allow drilling off the coast of Florida. While many are attributing this reversal to local pressure from Republican governors and environmental campaigners, it's safe to assume that the Sanchi tanker incident has played a major role in the announcement.
Trump is an oil-friendly president. Just last week his administration announced a five-year schedule of oil and gas lease sales proposed for the U.S. Outer Continental Shelf. The plan opens up more than 90% of the shelf for the largest-ever number of sales to energy companies. It's a big deal. Now, however, Florida is suddenly off the table.
Finally, oil prices just hit their highest levels since 2014. OPEC cuts are biting and demand is good. U.S. West Texas Intermediate (WTI) crude futures CLc1 rose to $63.47 a barrel and Brent crude futures LCOc1 were at $69.19 a barrel, up 37 cents, while Brent made $69.29. There is feverish speculation the it might break the magic $70 per barrel.
However, according to the Energy Information Administration's monthly report, U.S. crude production will soar to a record this year, and keep on going through 2019. U.S output will tip 10.85 million barrels a day this year, the biggest output since 1970. Even with the OPEC cuts, the EIA predicts global output at 100.34 million barrels a day. But that's before you factor in increasing geo-political concerns.
And there's the rub. Every major world event, however seemingly unrelated, has an impact on oil prices. But when events happen that are directly related to oil or within oil-producing nations, price volatility is automatically introduced. Yes, trends upwards or downwards may continue long term, but you can never, ever bet on that.
The tanker spill is an event that will have ramifications. Regulations will probably change, trust in companies will diminish, environmental voices will be raised ever-louder, more people start to look at renewable sources, the public will be horrified, the media full of negative stories and governments will think twice about new oil platforms in areas of outstanding natural beauty. However much we'd love to think that these incidents don't play into the price of oil, they do. And it's wise to remember that.
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