According to OPEC, the crude oil market is well supplied now and there is not any need for further production increase. However, the market obviously was not convinced with the statement and some reports have already shown huge declines in the Iranian crude oil exports five weeks ahead of the starting date of the sanctions, initiated by the United States with aim at reducing the Iranian oil exports to zero.
The price of West Texas Intermediate (WTI) and Brent for November delivery increased by 3.49 and 4.97 percent, respectively, in the week ending Sept. 28. At the end of the week, WTI and Brent settled at 73.25 and 82.72 U.S. dollars, respectively.
On Monday, WTI and Brent prices rallied after OPEC' s decision. The market was expecting a production increase decision from OPEC as the current export levels of Iran were about 35 percent below as compared with its oil export in April. WTI increased by 1.32 percent and settled at 72.08 dollars a barrel, while Brent crude increased by 2.65 percent and settled at 81.20 dollars a barrel.
Some analysts believe that over 1 million barrels per day of Iranian crude oil exports would go offline due to the looming sanctions.
Anna Mikulska, a non-resident fellow at the Center for Energy Studies, Rice University's Baker Institute for Public Policy based in Houston, told Xinhua that "Given increasingly difficult trade (as well as other) relations with the U.S., EU, China and Russia are willing to consider defying unilateral U.S. sanctions against Iran's oil exports through multilateral action."
She said, "New alliances - even among countries not necessarily known as allies or friends--have become easier to forge as U.S. administration has increasingly alienated many of its trade partners and traditional allies, either by protectionist position on trade or weakened commitment to multilateral institutions, including trade alliances and NATO."
Mikulska stressed that previous sanctions against Iran were successful because all parties multilaterally agreed to and enforced. "This may not be the case this time."
On Wednesday, the upward trend of the major benchmarks was interrupted as the U.S. Energy Information Administration (EIA) reported builds in both crude oil and gasoline inventories for the week ending Sept. 21, which sparked doubts on the demand.
EIA reported a build of 1.85 million barrels in commercial crude oil inventories, while the market was expecting of a draw of 2.7 million barrels.
Meanwhile, U.S. import of crude oil decreased by 222,000 barrels from the previous week's levels to 8.02 million barrels per day. Crude oil exports increased by 273,000 barrels per day from the previous week's levels to 2.64 million barrels per day.
According to EIA, weekly estimate of the U.S. oil production increased by 100,000 barrels per day at 11.1 million barrels per day.
EIA reported a draw of 2.24 million barrels in distillates inventory, while the market was expecting a build of 800,000 barrels. It also reported a build of 1.53 million barrels in total gasoline inventories, while the market was expecting a draw of 100,000 barrels.
EIA also reported that crude oil input to refineries decreased by 901,000 barrels per day to 16.51 million barrels per day. The decline is seasonal as some major refineries started their maintenance projects after the high demand season.
Normally, the crude oil inventories start building up during the maintenance season as the utilization rate of the refineries decline and the inventories of the oil products come down.
Analysts consider the increase in gasoline inventories as a bearish factor despite lower gasoline supply due to lower refinery utilization rates. Moreover, they see the increase in the crude oil inventories as a bearish factor as the U.S. crude oil exports are close to its record-highs.
After the EIA's weekly petroleum status report, WTI and Brent prices moved downward and settled 0.72 percent and 0.21 percent lower, respectively, on Wednesday.
Houston based service company Baker Hughes reported on Friday that the number of active drilling rigs in the United States increased by 1 to 1054, but the oil rigs in the country declined by 3 to 863.
The pipeline bottlenecks are causing big price differential between Midland and WTI. Analysts see those pipeline bottlenecks as a big threat against production growth of the Permian Basin, locate in the region of western Texas and southeastern New Mexico.
Anas Alhajji, an energy economist based in Dallas, Texas, told Xinhua that "the oil industry will always find a way to solve its problems."
WTI's rally was limited compared with Brent's during the last couple of weeks. Analysts think that the refineries already have a high amount of the light-sweet crude oil that comes from the Permian in their inventories, and the bottlenecks about getting that oil to the export locations will provide more support to WTI prices.
Matthew Smith, director of commodity research at ClipperData in Houston, said "The inventories of the Gulf refineries are already saturated with the light-sweet crude oil. The companies need to find ways to export more of the U.S. light-sweet crude oil. Otherwise, the price differentials between the two major oil benchmarks will not narrow down."
Moreover, U.S. Dollar Index went above 95 level after maintaining in the lower levels for a couple of weeks. U.S. Dollar Index is a measure of the value of the U.S. dollar relative to a basket of foreign currencies. Oil is mostly traded in dollars all over the world and a stronger dollar pressures the oil demand.
On Friday, WTI and Brent prices settled 1.48 percent and 1.45 percent higher, respectively. The price differential between WTI and Brent contracts widened and hit 9.47 dollars on Friday.
As the U.S. oil exports increase, the differentials between the two major benchmarks come down. The higher differentials give more arbitrage opportunities for traders to pursue. As a result, more U.S. crude oil would be shipped to Asian market.
In the near future, the oil market would be concerned with the ongoing trade disputes as it might lead to slowdown of economic growth across the world, especially in the case of China. The oil demand growth in China has been the main driver for the increasing world oil demand. However, the market's main focus is the potential supply deficit due to sanctions targeting Iran.