A crack in the Forties Pipeline System in the UK North Sea has sent the price of Brent up 1.5% to US$65.70/bbl as the pipeline needs to be closed until repaired. We see this event lending short-term support to Brent oil, but headwinds for oil prices remain in the medium-term. Forties disruption.
The Forties Pipeline System operated by INEOS carries over 40% of UK’s North Sea oil from over 80 offshore fields to refinery facilities onshore. Its capacity of 450,000 barrels per day represents a large proportion of UK production, but only a small portion of the 96 million barrels of global output. Nevertheless, it still accounts for more oil than Gabon and Equatorial Guinea’s (two of OPEC’s smaller members) combined production. Moreover, Forties oil is the largest source of oil in the Brent Benchmark. With Brent widely seen as the global benchmark for oil prices, the impact of a relatively small disruption could have large global consequences (most likely pushing up the price of close substitutes).
The length of the disruption is uncertain
The length of the disruption is uncertain, but could last several weeks. As a result the price-support from this event is likely to be transitory.
US production and exports are expanding strongly in the high price environment of recent weeks and this latest catalyst could push production even higher. Rig counts in the US have been rising for the past eight weeks and crude oil production has risen over the past seven weeks to a level not seen since the early 1970s. We expect US production to continue to hit fresh all-time highs as we head into 2018. The expansion of US oil production will weigh on global prices.
The spread between the US benchmark
At the moment the spread between the US benchmark, West Texan Intermediate, and Brent has widened to the highest level since 2015 when the US had pipeline problems that created a glut in US crude that couldn’t be processed quickly enough. Back in 2015 a wide spread persisted because the US did not allow oil exports to most countries. In December 2015 the rules changed and the US can now export substantial amounts of oil. We expect the availability of US oil to temper gains in the Brent benchmark.
The latest OPEC/non-OPEC deal to curb production until the end of 2018 has a fatal ‘get-out’ clause: the deal will be reviewed in June 2018. The clause likely came as a result of the insistence of Russia and other non-OPEC countries who don’t require such high oil prices to balance their government budgets. This week the U.A.E. and Kuwait have made it clear that they will push for discussion of some sort of exit strategy in June if the market is no longer over-supplied. OPEC’s price support could thus end prematurely.
We thus see the Forties disruption as a short-term price support, with plenty of headwinds to come in the medium term.
Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).