In the last month, US oil prices have fallen from close to $52 a barrel to below $45. Partly due to the large exports of US crude which have been around 1 million b/d in recent weeks, London prices have been running only about $2 a barrel higher than the US. Last week a report from the IEA predicting that the oil glut would continue into 2018 or beyond, combined with an unexpected jump in US commercial petroleum stocks, to push oil prices down by $2 a barrel to touch a low of $44.50 on Thursday before a slight recovery on Friday.
During the past month, there have been several important developments which could have a major impact on the course of oil prices and production in the next few years. First was the OPEC/NOPEC decision to extend the current 1.8 million b/d production cut for another 18 months despite increasing evidence that increasing US shale oil output and rebounding Libyan and Nigerian production are offsetting the production cut. Because of the timid nature of the OPEC decision, increasing stockpiles and higher oil production, the price of crude has fallen some 11-12 percent in the last three weeks leaving US futures below $46 and Brent below $48 a barrel.
The price slump which began in early April continued last week with NY futures falling below $46 a barrel on Thursday, down from nearly $54 last month. Behind the move are fundamentals saying that a combination of higher US crude production and rebounding Libyan output are offsetting the 1.8 million b/d OPEC/NOPEC production cut. In the past week, several oil ministers supporting the production cut have issued reassuring statements as to how well the cut is being observed; that the cut likely to be extended until the end of the year; and that the 3rd quarter will see substantial progress in easing the oil glut. Outside analysts continue to say that deeper cuts and extending on into 2018 will be necessary to offset booming production in countries not subject to the cut.
Oil prices fell again last week on concerns that the OPEC production cut will not be enough to offset increasing US shale oil production. The reopening of two Libyan oilfields which could bring Libyan production back to the vicinity of 700,000 b/d added to the pressure on oil prices. At week’s close, New York futures were below $50 a barrel with London a couple of dollars higher, both down about 8 percent from their April peak of $54-$55 a barrel.
Last week, oil prices underwent their biggest weekly decline in a month as the markets lost confidence in OPEC’s ability to reduce the global oil surplus in the near future. The move was supported by reports that a glut was developing in the physical oil market in the North Sea area as lower Asia purchases, increased shipments of US crude to the EU, and more supplies coming out of storage all served to drive down prices. At week’s end, US futures were once again trading below $50 a barrel and London’s Brent below $52.
After climbing steadily since March 27th, oil prices stabilized at the $53-55 level late last week. As usual, prices got a boost from various oil minister’s comments about how well they were doing in meeting their production cut goals and how they are considering extending the cuts until the end of the year. The monthly OPEC report shows that the cartel’s production jumped by about 1.2 million b/d after production cuts were first seriously discussed last fall, and then fell about the same amount after cuts started in January. The net result was to leave OPEC’s production about where it was through most of 2016.
After falling on Monday on the news that Libya was resuming production from its largest oilfield that was shut down the previous week, oil prices moved higher for the next three days on hopes that the OPEC production cut was having the desired effect. Some believe that oil traders have been too busy watching the well-publicized build in US crude stocks, while excess inventories in other parts of the world are shrinking away unnoticed. Futures prices, which were about $48 a barrel the US the week before last, climbed to over $51 a barrel by Thursday.
Crude prices rebounded sharply last week erasing nearly half the $7-8 selloff that began in early March. The March price drop came on the consensus that increasing crude inventories and ever higher rig counts would offset the 1.8 million production cut that OPEC was trying to orchestrate. At the close Friday, New York futures were at $50.85, and London was at $53.83.
Last week oil prices fell for the third time in a month, closing in New York at just below $48 a barrel. Increasing US crude inventories remain the chief motivation for the price drop as many traders now see higher US production as largely offsetting the OPEC/NOPEC production cuts. OPEC and its allies met in Kuwait last week to consider the situation and to talk about extending the cuts until the end of the year. In the meantime, the US rig count continues to grow amid some doubts as to whether all the new drilling will result in a concomitant amount of production.
After a quick drop of $3-4 a barrel the week before last, oil prices steadied last week as the markets contemplated just how effective the OPEC/NOPEC production freeze will be in the short term. Speculators had enthusiastically embraced the production freeze when it was announced late last year and drove open interest in futures to record highs. The cuts, however, did not come fast enough or be deep enough to offset increasing oil production from other countries and lower demand. As one important trader put it, “The OPEC cuts were good enough to prevent a repeat of the glut of last year, but it’s a different story if you want to have oil at $60 or $70.” For now, the physical oil market continues to indicate an oversupply situation.
Last week was the most active in many months as oil prices, widely believed to be stuck in a narrow trading range for the foreseeable future, plunged some 8 percent in the last three days of trading. The price decline was triggered by an unexpected build of 8.2 million barrels in US crude stocks along with growing concern about increases in the US oil rig count. The week was highlighted by the annual “CERAWeek” conference in Houston which was attended by oil ministers and CEOs of oil companies from around the world. Many took advantage of the meeting to express opinions or issue warnings about where the global oil industry was headed.
On Thursday last week NY oil prices fell to near the bottom of the $52.50-$54.50 trading range they have been stuck in since early January. On Friday a falling dollar pushed prices higher to close at $53.33 in New York and $55.22 in London. There was much discussion last week about the status of OPEC’s production cuts and how they were being achieved. Much of the cut seems to be coming from the Saudis whose production was down by 90,000 b/d during February to 9.78 million. Overall OPEC production, however, only fell by 65,000 b/d during February. Ecuador, Venezuela, Angola, the UAE, and Iraq are still well below their targets under the production cut agreement. The Saudis finished February with a production cut of 157 percent of their target which was enough to bring all of OPEC close to its goal. The non-OPEC exporters participating in the cuts seemed to have implemented around 66 percent of their targeted cut.
Oil prices moved to the top of their trading range last week as many traders believe prices are about to move higher. Even though the EIA reported that US oil stocks rose the week before last by 600,000 barrels to an all-time high of 518 million barrels, some traders are saying that we have reached the end of the buildup in US crude stocks which has been going on for the last two months. A drop in US crude imports is being interpreted as the result of the OPEC production cut. Many are expecting that US crude inventories will continue to fall on lower imports and increased US crude exports, which are now up to circa 1.2 million b/d, the highest on record. The surge in exports of crude seems to be due to lower availability of OPEC crude in Asia, and the gap between Brent and US crude prices which have averaged $2.24 in recent trading.
Oil prices have moved little since they jumped from the mid-$40s to the mid-$50s in late November. Last week was no exception. OPEC hints about extending the price cuts beyond mid-year supported prices last week despite several indicators which suggested that the surplus may continue and it may be difficult to rebalance the markets in the short term.
Oil prices rebounded last week as the IEA confirmed that the ten OPEC members obligated to cut oil production are making good progress and obtained 91 percent of their goal by the end of January. The agency also reported that OECD crude stocks fell by nearly 800,000 b/d in the 4th quarter of 2016 although stocks continued to grow in China and other emerging economies. If OPEC and the other production cutters can maintain this level of cuts for the next five months, the IEA says that global stockpiles should drop by about 600,000 b/d during the first half of this year. This was the kind of news that many oil speculators wanted to hear. Hedge fund bets on higher oil prices have surged in recent weeks as many markets participants say they are expecting higher oil prices later this year.
With the advent of the Trump administration and Republican control of the Congress, the world oil situation seems likely to become more uncertain than usual. In the last two weeks, the new President has signed numerous executive orders that will have an impact on the oil industry in coming years. The President and the Republicans in Congress will soon have done everything they can to launch a new oil boom by reducing environmental and financial regulations; permitting whatever pipelines the oil industry wants to build; and opening federally-controlled property and offshore areas for drilling. Republicans have long held that America would be energy independent were it not for the restrictions unfairly placed on the industry. While these measures may eventually spur more drilling, for the time being, however, oil prices and the demand for oil will still determine investment decisions. Some are questioning whether the Keystone XL will be built in the near future given the relatively low oil prices and the shale oil boom that have become important since the pipeline was planned.
Prices moved slightly higher last week as the markets continued to watch the decline in oil production by most OPEC members and a few other exporters interested in seeing oil move higher. The evidence continues to accumulate that progress is being made in achieving OPEC’s 1.8 million b/d cut. In addition to a number of OPEC luminaries who assured the world that the cuts are happening and that the markets would be balanced shortly, tanker-tracker Petro-Logistics said that its information indicates that OPEC will reduce its supply by 900,000 b/d in January. This number does not include 11 non-OPEC members that are also supposed to be cutting production 600,000 b/d. The CEO of Petro-Logistics which has been monitoring tanker movements for 30 years said this suggests “a high level of compliance thus far.”
Three themes dominated the oil news last week. 1. Will OPEC with Russian help succeed in cutting production enough to rebalance the oil markets and move prices significantly higher? 2. Will the US oil industry rebound so vigorously as to offset the OPEC cuts? 3. And finally what will the be the impact of all the new energy policies the Trump administration is beginning to implement?
For the last month oil prices have been stuck in a trading range in New York of between $52 and $54 a barrel. In London, oil has been trading two or three dollars higher. After a 30 percent jump in the last six weeks of 2016 in response to the OPEC production freeze, prices have stabilized as the markets wait to see the degree of compliance with the pledged production cuts. It may take several months to establish a clear trend as so many nations are involved in the cut. While a few countries, particularly the US, publish oil production and inventory statistics weekly, others do a poor job of collecting statistics. A few release incorrect production numbers they know to be untrue for a variety of political reasons.
Most of the discussion last week focused on the year just past and what 2017 will bring. Oil prices barely moved during the holiday week closing out the year at $53.72 in New York and $56.82. During 2016, however, US futures closed up about 45 percent for the year and London about 52 percent. It was quite the year for the oil industry with prices ranging from $30 to $55 a barrel; the election of fossil-fuel-friendly Donald Trump to the US presidency; and the OPEC/Russia production cut agreement deemed responsible for the record price rebound during the year.
For the last two weeks, oil prices have hovered around $53 a barrel in New York, and a couple of dollars higher in London. Optimism that an agreement among the major oil producers will actually lead to a 1.8 million b/d production cut during 2017 is being balanced off by a stronger dollar, the revival of Libyan and Nigerian oil production, and a steady increase in the US shale-oil rig count.
On Saturday, OPEC and non-OPEC oil exporters agreed to an additional 562,000 b/d non-OPEC production cut in addition to the 1.2 million b/d cut that OPEC agreed on last week. At the meeting, Mexico pledged to cut 100,000 b/d, Azerbaijan 35,000 b/d, Oman 40,000 b/d, and Kazakhstan 20,000 b/d after strong diplomatic pressure was applied. Some analysts expressed doubt as to whether the cuts pledged by Mexico and Azerbaijan are valid reductions as their production was on course to decline by that much anyway next year due to natural depletion. The Kazakh cut, however, was seen as important as the country was due to increase production in 2017 by 160,000 b/d as its giant new oil field came in production.
The agreement between OPEC and Russia came as a surprise for most. Until the Vienna meeting started, there was much pessimism that a deal would be reached and all indications had been that negotiations were deadlocked over the issue of who would cut by how much. The breakthrough seems to have come when Moscow changed its position from “freeze but no production cut” to agreeing to reduce output by 300,000 b/d from the 11.2 million b/d it reached in November. This change, plus the agreement by Baghdad to cut oil production by 210,000 b/d, was enough to convince the Saudis to cut by 486,000 b/d and the other Gulf Arab states would join in for at total Gulf Arab cut of 786,000 b/d. Libya, Nigeria, and Indonesia were left out of the agreement and Tehran was allowed to increase production by 90,000 b/d to 3.8 million – somewhat short of their 4 million b/d goal. Given the bad relations between Riyadh and Tehran, allowing the Iranians to continue increasing production was the toughest part of the deal for the Saudis to swallow.
Oil prices were steady in the first part of the week as the markets waited for news about the OPEC meeting this week. When it was announced on Friday that the Saudis would not attend a preliminary meeting with the Russians and other non-OPEC members, prices dropped about $2 a barrel to close circa $46 in New York and $47 in London. Although analysts and market traders remain skeptical that any significant agreement will be reached, the week began with a spate of reports from “insiders” that “progress” was being made.
Oil prices climbed on Monday but then held steady for the rest of the week as talk of an OPEC agreement balanced against a stronger dollar and increasing global oil surpluses. At week’s end, New York futures settled at $45.69, about $2 above the recent lows touched the week before last, but $7 below the tops of the speculative bubbles set in June and early October.