Small Outages Have Big Impact on Oil Prices

Oil prices have climbed because of reductions in supply, some expected and others surprising. That tension may persist for a while, but the market can fill the void within a matter of months.

One factor that will exaggerate supply tightness is that Iran appears to have put as much crude onto the market as possible ahead of sanctions, allowing it to rebuild its inventories once some customers step away.

The expected fall in exports from Iran of perhaps several hundred thousand barrels a day, joined with declines in a few other hot spots, helped push the international crude benchmark Brent to $80 a barrel last week for the first time since 2014.

The main non-Iranian factor is Venezuela, where production has been falling steadily. Output in April was about 1.4 million barrels a day, down 500,000 barrels a day from the 2017 average.

Venezuela’s exports may be taking another leg down following a legal scramble for the assets of Petróleos de Venezuela SA outside its borders. Some already out of its control are crucial to its ability to market crude.

Less noticed is Canada. As recently as February there was such a glut of heavy crude in Alberta that the local benchmark’s discount to Brent had reached more than $25 a barrel. That glut had begun to ease as tar-sands facilities in Alberta slowed production for maintenance, before wildfires in the Canadian province earlier this month cut off power to a pipeline carrying 194,000 barrels a day of crude. The discount narrowed to less than $5 a barrel last week.

Finally, a pipeline issue in Nigeria forced Shell’s local subsidiary on Wednesday to declare force majeure—a clause that allows contractual shipments to be suspended—on 250,000 barrels a day of production.

Based on the combined disruptions, analysts at


project that global oil and liquids inventories will drop during the current quarter at the fastest pace since last year. That contrasts with the projection of the U.S. Energy Information Administration, which sees inventories having bottomed out in the first quarter at 2.812 billion barrels. They expected stockpiles to grow a bit this quarter.

Small outages take on added importance when they coincide with others in the 96 million-barrel-a-day global crude oil market. The only ones that should stick are the big ones, Iran and Venezuela—enough to keep prices high into the early summer.

After that, the high prices should help boost supply. U.S. shale oil executives may no longer restrain spending, and countries like Saudi Arabia and Russia will be tempted to fill the void left by Iran even before their supply agreement ends.

Price spikes contain the seeds of their own destruction in a commodity market.

Write to Spencer Jakab at

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