–David Houseknecht, a senior research geologist at the U.S. Geological Survey, says the Smith Bay discovery in Alaska seems to have incredible potential. Then he adds: “But it’s the last one you’d want to bet your retirement money on.” (3/15)
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.