February 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil edged lower in February, retreating by $1.36 (-4.3%), to $30.32 per barrel -- its lowest point since September 2003. The price decline coincided with a slightly weaker U.S. dollar, the lagged impacts of a 356,000 barrel-per-day (BPD) increase in the amount of oil supplied/demanded in December (to 19.5 million BPD), and another jump in the accumulation of oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI widened to $1.86 per barrel. 

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Commentary from ASPO-USA’s Peak Oil Review editor Tom Whipple: “Despite [supply outages in Kurdistan and Nigeria], the global market is still oversupplied and many traders are looking for the Saudi-Russian production 'freeze' to morph into an actual production cut that will rebalance the markets. However, at the IHS-CERA oil conference in Houston last week (late February), Saudi Arabia’s oil minister made it clear that a production cut was not going to happen despite all the hype and optimism. The Iranians seconded the sentiment saying they were not going to freeze or cut anything until their production was back to the pre-sanctions 4 million BPD. Moscow chimed in with the claim that even with a freeze its oil production could set a new post-Soviet record this year.

“Amidst all the gloom and doom about low prices at the Houston conference, the IEA rolled out its most recent thoughts about the future of oil. The Agency naturally is concerned about the major cutbacks in capital investment that are underway and believes the industry will be hard pressed to recover after prices rebound later in the decade. The executive director of the IEA says he expects prices to climb back up to $80 a barrel by 2020. He also believes there will be a second leg to the U.S. shale oil boom which will be quick to recover when prices rise and will send U.S. domestic oil production to new highs by 2021.

“In the meantime, the U.S. oil industry is going through a major contraction with numerous bankruptcies and much selling off of assets. During the Houston conference, it was noted that the reason there are so few mergers is that many company debts become due the minute the company comes under new ownership. Few companies are willing to bear the upfront costs of paying off the debt of new acquisitions, even at bargain prices.

“For the immediate future, it looks as if U.S. shale oil production will be falling as the number of active drilling rigs continues to fall steadily. The week before last the rig count fell by 13 to 400. However, there still remains a backlog of hundreds of wells that have been drilled and are awaiting fracking before they can start producing. This backlog and increasing production from large offshore projects nearing completion in the Gulf of Mexico may be enough to keep U.S. domestic production from falling as fast as many foresee.  Even the Saudis noted in Houston last week that the U.S. shale oil industry is very light on its feet. Once having established itself in an area with drill sites, permits, and the logistic infrastructure already in place, shale oil production can be increased very rapidly in comparison to what would be required to increase OPEC members’ production. The problem in increasing shale oil production will come when the most productive 'sweet spots' are all drilled.  Some knowledgeable observers believe this will come circa 2020.

“Concerns once again are increasing that a shortage of oil and oil product storage capacity in the U.S. could drive oil prices considerably lower within the next few months. The main U.S. storage facility and futures delivery point at Cushing, Okla. is already 80 percent full, is turning away some types of business, and at the current rate of filling will be completely filled in another four months. The same problem is occurring in other facilities along the Gulf Coast and in the mid-west. Refiners in the mid-west are already cutting back gasoline production as the demand is simply not there despite the very low prices ($1.11 in parts of Minnesota) and the much-ballyhooed economic recovery.  Some analysts are convinced that another major down leg to the oil markets is virtually certain to occur before supply and demand come back into balance.” 

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News items from OilPrice Intelligence Report editor Evan Kelly:

U.S. oil production falling. More and more U.S. shale companies have conceded that their production levels are set to fall this year, which brings cuts in U.S. output into clearer focus. Last year, although all companies were hurting from the crash in prices, there was also a sense of triumphalism in the face of the bust, a confidence in the fact that OPEC was unable to break American shale. However, while the magnitude of cost cutting and resilience was impressive, reality is setting in this year. Several companies have already announced that production would fall amid a sharp reduction in upstream spending this year, including Continental Resources (NYSE: CLR), Devon Energy (NYSE: DVN), and Marathon Oil Corp. (NYSE: MRO). Last week, EOG Resources (NYSE: EOG) joined the growing number of companies seeing declines when it said its 2016 production levels would fall. The EIA released its most up to date monthly production figures, which showed that overall U.S. oil production fell to 9.26 million barrels per day in December, a decline of 50,000 barrels per day from the month before. Output is now more than 400,000 barrels per day lower than the April 2015 peak.

Oil prices inch up. The declines are starting to create a little bit of bullishness in the oil markets, with prices surging to the mid-$30s per barrel, up dramatically from their January lows. Investors are starting to become more confident that the worst is over. With U.S. output now solidly in decline - a trend that will likely accelerate in the months ahead as drilling slows even further - the supply glut will start to ease, albeit slowly. Hedge funds and other major investors are starting to reduce their short positions and take stronger net-long positions, an indication that speculators think that oil prices have bottomed out. It is not hard to imagine $40 oil just around the corner. 

Rail cars for oil storage. Production is slowing but storage is still at a premium. The glut in oil supply and the shrinking availability of storage is leading to the growing practice of storing oil in rail cars. The Wall Street Journal reported that delivering crude by rail is starting to decline because it is no longer profitable with oil prices down in the mid-$30s per barrel. But with rail cars sitting idle, many are starting to be used to store oil, a practice that the industry has dubbed "rolling storage." The practice will likely remain limited on a permanent basis, however, as storing oil on railcars is subject to safety regulations, liability concerns and a need for track space.

ExxonMobil's record bond sale. ExxonMobil (NYSE: XOM) made a big move with a $12 billion bond sale, its largest on record. The world's largest publically-traded oil company could use the cash to buy up assets on the cheap. Exxon held its cards close to the vest, saying that the proceeds would be used for "funding for working capital, acquisitions, capital expenditures, refinancing a portion of our existing commercial paper borrowings and other business opportunities." ExxonMobil still has a AAA credit rating, one of the few companies in existence to have the highest rating possible, but S&P issued a "negative" rating in early February.

Saudi cash reserves fall. Saudi foreign reserves continue to dwindle as the OPEC nation tries to shore up its finances and maintain its currency peg. In January, Saudi Arabia's foreign exchange dipped below $600 billion for the first time in four years, according to the latest estimates. The government is burning through cash reserves at a rate of about $14.3 billion per month.

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.