12-09-2016

Worst Oil Market In A Generation Shows No Sign Of Stopping

oil

Talk of oil production freezes and even production cuts have been tossed around so much lately among analysts, traders, pundits and major producers that it’s hard to keep up with who said what, and which comments to take seriously.

Against the backdrop of all of this conjecture is a more than two-year long global oil supply glut and price drop that has set the oil industry back on its heels. Lay-offs, bankruptcies and a general souring of the industry has become a “new normal,” but prices have done anything but find a “new normal.”

Down from $114 a barrel in the summer of 2014, prices are bouncing around the mid to upper $40s range, with little reason to think that they will find a floor – which brings us to OPEC de facto leader Saudi Arabia and Russia, the world’s top two oil producers.

Ahead of an informal meeting of producers later this month in Algiers, the two oil producing juggernauts agreed a few days ago to “agree” to do something about oil markets, possibly in hopes that rhetoric could help restore market equilibrium.

While headline grabbing announcements can indeed move markets, it’s always short lived, lasting usually a day or so, then the reality of the ongoing supply glut quandary kicks back in with corresponding pressure on prices.

As I pointed out in a post a few days ago, talk is cheap and what needs to happen is not more talk, or even a production cap at current levels, which are still at record highs for OPEC producers and Russia, in spite of marginal pullbacks by OPEC the last few months.

Real production cuts need to be agreed to – something that has been so elusive in the past two years, that it’s getting hard to remember just when major players could agree on anything of substance.

With a little less than four months left in the year, plenty of analysts and traders are giving updated analysis on where prices will be for the remainder of the year and 2017.

Traders speak out

On Wednesday, the U.S. Energy Information Administration (EIA) released its “Short-term Energy Outlook,” forecasting that global benchmark, London traded Brent oil prices will average $43 per barrel for the rest of the year and $52/bbl in 2017.

U.S.-benchmark West Texas Intermediate (WTI) will average $1 less than Brent prices: $42 for the year and $51 for next year, the report says.

In the understatement of the week, the EIA said “the current values of future and options contracts suggest high uncertainty in the price outlook.”

Both pricing points offer dismal news for many U.S. shale oil producers whose break-even production points are higher that EIA forecasts. However, it should be noted that break-even points vary across individual wells and from company to company with a host of variables coming into play, from drilling costs to completion costs to well depletion rates. Some companies have clawed back, lowering break-even points to where they are profitable at current prices.

Last week, Helima Croft, RBC Capital Markets Global Head of Commodity Research, said that oil prices are going to be “sloppy” until the end of the year, amid over supply concerns and inventory levels . She sees prices reaching into the $50s mark by year’s end.

One problem, according to Croft, isn’t daily supply demand fundamentals which are actually in balance but huge inventory levels, a macro-issue.

Saad Rahim, chief economist of Trafigura Group, an oil trading house, agrees. He said “the market has yet to start working through millions of barrels of inventory accumulated during the downturn.”

However, on Thursday markets received some brief respite after weekly data showed a surprise decline in U.S. crude oil stock piles. But analysts said that the decline only reflects bad weather that kept cargoes from reaching U.S. ports, so it’s temporary.

Other analysts and traders are chiming in. On Thursday, Bloomberg said that 14 of 15 senior oil market traders interviewed this week expect crude to remain between $40/bbl and $60/bbl over the next 12 months.

Arzu Azimov, head of Socar trading SA said “the market will stay in the corridor of $40 to $50, max $55.”

A few mentioned an ongoing problem when prices start to increase too quickly – idled U.S. shale production. As prices tick up, even marginally, idled companies start production again, thereby increasing supply, with the effect of driving prices down once again.

More U.S. production and more supply and increased inventory builds could arguably send prices back to the $30s level. In January, prices hit $26/bbl.

Others said that “market re-balancing has been pushed back by at least six-months from their projections in early 2016 because of higher than expected production from Iran and Saudi Arabia, coupled with the resilience of U.S. output.”

It’s also conceivable that Saudi-Iranian geopolitical tensions and regional rivalries could hamper OPEC from reaching a production freeze and particularly a production cut in either Algiers later this month or at the November OPEC meeting in Vienna.

Going a little deeper, Christopher Ruehl, chief economist at Abu Dhabi Investment Authority, said that oil prices are likely to stay around current levels for the next two years. If Ruehl is right, the ongoing oil market doldrums, which has been called the worst oil crash in a generation, shows little sign of stopping.

Source: Forbes

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