January 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil in January dropped to its lowest point since November 2003, retreating by $5.51 (-14.8%), to $31.68 per barrel. The price decline coincided with a stronger U.S. dollar, the lagged impacts of a 162,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in November (to 19.4 million BPD), and another uptick in the accumulation of oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI reversed for the first time since August 2010; Brent was $0.98 per barrel cheaper than WTI. 

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Commentary from ASPO-USA’s Peak Oil Review editor Tom Whipple: 

Last week [i.e., the last week of January] there was a surge in oil prices based on rumors and statements from Iraq's oil minister and a Russian pipeline official that Russia and the Saudis might be considering a meeting to discuss "coordination" of their oil production. The merest hint of a supply cut was enough to send traders into a frenzy. Short positions were covered and prices rose from below $30 a barrel to nearly $36 in London. The story was quickly denied by numerous OPEC officials and even by Russia's deputy prime minister, but oil prices stayed firm closing at $33.62 in New York and $34.74 in London [the rebound can be seen in the graph below].

The bottom line in this frenzy, which took oil prices up nearly 25 percent, is that Iran says flatly it will not cut oil production until its exports increase by 1.5 million BPD; the Saudis say they will not cut unless other exporters including Iran and Russia do; and Moscow says it will not cut unless it is in coordination with OPEC, but hopes for higher prices die hard. This week Venezuela's oil minister will make the rounds, visiting Russia, Qatar, Iran and Saudi Arabia in an effort to set up a meeting in February to "coordinate" oil production. Numerous outside observers have termed the rumors of coordinated production cuts as rubbish and expect further declines in oil prices this winter.

In the meantime, fundamentals continue to worsen. U.S. crude inventories increased by 8.4 million BPD in last week's stocks report; Iraq announced record-high oil production; and OPEC output continues to grow.  According to a Reuters survey, OPEC oil production climbed to its highest level in recent history in January as Iran increased production and sales following the lifting of sanctions, and the Saudis and Iraq increased output.

EIA's Monthly Energy Review is out with new production numbers. U.S. production (crude and condensate) in December is given as 9.19 million BPD down 500,000 BPD from the 9.69 million produced in April. Non-OPEC production was down by 763,000 BPD from 47.2 million BPD in December 2014 to 46.4 million last October. World production (crude and concentrate) which peaked in July at 80.5 million BPD was down by 461,000 BPD to 80.0 million in October.  While non-OPEC production will likely continue to fall for a while due to the massive reduction in capital investment that has and continues to take place, OPEC with increasing Iranian production seems destined to offset the non-OPEC production decline for this year at least.

Last week brought a plethora of bad news concerning falling oil company profits, reduced capital investment, pending bankruptcies, and scrapping of expensive drilling rigs. All this is bound to greatly lower oil production by the end of the decade. 

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Commentary from OilPrice Intelligence Report editor Evan Kelly: 

The prospect of cooperation between OPEC and Russia was always a long shot, and the markets apparently have started to come around to that realization. Crude prices fell sharply at the start of this week as hopes faded for coordinated production cuts.

Russia revealed that it hit another post-Soviet record high in oil production in January, breaking the previous record set in December. Output stood at 10.88 mb/d. Venezuela's oil minister Eulogio Del Pino visited Moscow to discuss the possibility of coordinating with OPEC but nothing new came from the meeting. Venezuela is desperate for oil prices to stabilize, but Russian officials merely issued the same suggestions that they did last week, which was that they were open to discuss the possibility. Investors should not expect much to come from this unless more concrete pledges are issued by all parties involved.

The latest manufacturing data from China also poured cold water on oil prices at the start of the week. China's manufacturing purchasing managers index dropped to 49.4 in January, down from 49.7 in December. A reading below 50 indicates a contraction. January was the sixth consecutive month of a contraction, and manufacturing activity in China is now at its lowest level since August 2012.

BP and ExxonMobil reported earnings on Tuesday. BP posted the worst loss in recent memory, down $6.5 billion for the full-year of 2015. Earnings were down by 91 percent in the fourth quarter, which was also the sixth consecutive quarter in which earnings were lower than the previous. BP's market cap is now below $100 billion for the first time since the Deepwater Horizon disaster in 2010.

ExxonMobil fared better, with earnings of $16.1 billion for the full-year, although those figures were 50 percent lower than for 2014. The oil majors continue to show determination in sticking to their dividend policies, although it is unclear how long that can keep up. Net debt continues to rise in order to fund the generous dividends.

Decommissioning oil rigs in the North Sea could accelerate this year because of low oil prices, according to Wood Mackenzie. The North Sea has high production costs and many producing fields are in the waning years of their operating lifespans. Companies are trying to squeeze out the remaining reserves, but low prices could force up to 50 oil and gas fields to permanently shut in production this year. After that, the platforms and rigs that have been in place for decades would be decommissioned. The smaller and more expensive fields are where the industry will start first, but Wood Mac expects 140 fields in UK waters to be shuttered over the next five years. Decommissioning brings its own set of costs, and some companies might rather continue to pump than take on the costs of dismantling infrastructure. Nevertheless, decommissioning in the North Sea will pick up and will become its own growth industry in the years ahead.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.