Where next for the oil price?
“The ripple effects [of the recent oil slide] are starting to come to the fore”, writes Gluskin Sheff strategist David Rosenberg, “with the energy debt markets playing catch-up to the beaten-up stock market segment”. “I don’t see Parsley dialing back”, said Chief Executive Bryan Sheffield.
Oil production in the U.S. continues to grow despite the second weekly decline in crude stockpiles. The five-year average decline is at 1.3 MMbbls during this period.
“Oil is trying to balance, but I’m anxious that it would continue to head lower”, said Aaron Clark, portfolio manager at GW&K Investment Management.
Experts in the global oil and gas sector have argued that the US shale industry is in danger of frustrating the very rally that it had hoped to take advantage of as members of Organisation of Petroleum Exporting Countries (OPEC) extend production cut agreement.
While Canada remains the largest destination for US crude oil exports, its share of total USA crude oil exports has declined.
Libya’s National Oil Corporation reported in May it would “raise production to 1.32 million barrels per day (bpd) by the end of 2017, at a cost of $550 million”. But it noted that petroleum in storage was plentiful and that gasoline was above the upper limit of the average range for this time of year.
West Texas Intermediate crude, the U.S. benchmark, was 4.6 percent lower on the week at US$42.69 a barrel at 8:06 a.m. London time, the fifth consecutive weekly drop.
The worldwide Brent benchmark rose 0.41 percent to $46.21 a barrel, still far below its price of $54.45 a barrel in February.
US crude futures were up 0.52 percent at $42.74 per barrel.
At the heart of the ongoing glut is that recent efforts to reduce production by OPEC suppliers as well as Russian Federation has been met by soaring output from the United States and OPEC members Libya and Nigeria, which are exempt from the cuts.
In the meantime, Tropical Storm Cindy is shutting down gulf oil production. Unexpected increases in inventories in each of the past two weeks spurred the slide in oil prices to a nine-month low, at one point Tuesday dipping below $43 a barrel.
Thanks largely to shale drillers, U.S. oil production has risen by more than 10 per cent over the past year to 9.35 million bpd, close to levels of top exporter Saudi Arabia. The U.S. gasoline figure is important because one in every ten barrels of oil produced worldwide ends up in the fuel tank of a U.S. passenger vehicle.
“Rising US output continues to stress markets, with increasing evidence that improved efficiency and technology makes numerous shale plays profitable below US$40 a barrel”, analysts at Cenkos Securities wrote. The rig count has risen 23 weeks in a row, the longest streak on record.
Healthcare stocks were helped by reports that U.S. President Donald Trump’s efforts to rein in drug prices may be friendlier than expected to the industry, according to Brad McMillan, Chief Investment Officer for Commonwealth Financial in Waltham, Mass.
On the economic front, markets could be reacting to Tropical Storm Cindy, which made landfall on the southern US coast and is disrupting port activities.
A rise in US output offsets part of the cuts Saudi Arabia has organized. That represents about 96,000 barrels a day of output hovering over the market. And Libya has increased its oil exports. “It’s good OPEC has cut, but they’re not the only game in town anymore”. The EIA drilling productivity report showed that shale oil output will likely increase by 122,000 bpd in June to 5.40 mbpd. In addition, he said in an email, “the so-called “cuts” implemented in January were off of record high levels producers reached in October previous year”.
“It’s very hard to see at what point in time the original objective of this OPEC/non-OPEC agreement can be reached”, Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida, said by telephone.
As Saudi Arabia, Russia and their allies reduce output, supply that’s beyond their control keeps rising. US shale is returning at full force. USA oil inventory (storage) levels continue to remain stubbornly high, and that is weighing heavily on the price of oil.
Brent crude futures were up 28 cents at $45.50 a barrel at 0830 GMT.
USA oil stored at the pipeline hub in Cushing, Okla.
The glut isn’t expected to balance out this year as earlier forecast, partly because the shale boom continues to crank out more crude. “This has been extremely successful”, said Vallourec’s Crouzet. Following the news, a similar statement emerged from a group of oil-producing nations outside of OPEC, led by Russian Federation, who agreed to remove an additional 558,000 barrels from production per day. And the oil is more valuable than what Brazil has historically produced at fields closer to shore where the sulfur content is higher, the company said. In the last month alone, explorers drilled 125 more wells in the Permian Basin than they would open. The last time we sold off like this in early May we snapped back. Oil prices are now down more than 20% since hitting a high in January placing the market officially into bear market territory.
“There is selective perception in the market at the moment”.