Sorry OPEC, Oil’s Surge Is Made in America

Oil is up a lot, but the reason is not OPEC’s decision to boost production

By Spencer Jakab

          Oil equipment near Bakersfield, Calif. Photo: lucy nicholson/Reuters 

Your perception of how the world is moving depends a lot on where you are standing—especially when it comes to the world oil market.

Energy-related headlines in the U.S., the world’s largest crude consumer and soon to be its largest producer, have been almost unremittingly bullish in the past several days. The main reason is that crude prices surged to a three-and-a-half year high in the wake of last week’s meeting of the Organization of the Petroleum Exporting Countries, despite that group’s decision to raise output quotas.

But it is the U.S. benchmark, West Texas Intermediate, that has surged, not the globally important Brent that tends to be more sensitive to OPEC’s decisions. As of Friday morning, the former had rallied by 12.5% in three weeks while Brent was a mere 1.7% higher over the same time.

Oil futures prices in June

Source: FactSet

Much has to do with North American rather than global conditions. Surprisingly strong drops in inventories at Cushing Okla., the delivery point for the WTI futures contract, are the biggest reason. Most recently at 29.89 million barrels, inventories have dropped 4.7 million barrels in three weeks and are now half their level this time last year.

Another reason is a major outage in western Canada affecting 360,000 barrels a day. While those barrels don’t necessarily flow to Cushing, refiners may source replacement barrels from U.S. producers. The problem could last several weeks. A one-month outage would create a 10-million-barrel deficit.

WTI’s surge also comes from an extreme and unsustainable discount relative to Brent. By late May, the discount had reached its highest since 2015 at over $10 a barrel. That reflects surging U.S. production temporarily swamping local shipping capacity. Before the surge in shale production, WTI often traded at a small premium to Brent.

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