March 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil jumped in March, rising by $7.23 (+23.8%), to $38.21 per barrel. The price increase coincided with a noticeably weaker U.S. dollar, the lagged impacts of a 489,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in January (to 19.4 million BPD), and an apparent plateau in the accumulation of oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI narrowed to $0.66 per barrel. 

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Commentary from ASPO-USA’s Peak Oil Review editor Tom Whipple: “The six-week long surge in oil prices which pushed the price of crude up by roughly 50% seems to be coming to an end with prices down 6% last week. Looming behind the price increase was the notion that the world’s major crude exporters would to get together and sign an agreement to freeze production at current levels. Supporting the price jump was an increase in U.S. gasoline consumption as prices fell to levels not seen in decades and the never ending hope that the U.S. economy was about to get better. Much of the surge was caused by the liquidation of the unprecedented short futures positions that hedge funds and other speculators had built up during the nearly two-year slide of oil prices. When oil fell below $30 a barrel, many speculators figured that the long price slide was over and that oil was unlikely to go much lower. The resulting liquidation of positions which pushed up prices was the largest on record.

“Last week the Saudi deputy crown prince said his country would not be agreeing to any production freeze as long as its dire enemy, Iran, continued to increase its production. This assertion threw into doubt whether the Doha meeting which is to take place on April 17th will actually occur and even if it does, whether an agreement on a production freeze will be signed. This fear that there will not be an agreement was reinforced by Kuwait’s announcement that it is about to reactivate a 300,000 BPD oil field – adding still more oil to the glut.

“Among the pressures tending to push prices lower is the continuing buildup in global crude stockpiles.  The slower-than-expected decline in U.S. oil production despite a large drop in the number of active drilling rigs is weighing on the markets as is a substantial increase in U.S. oil imports and an unexpected drop in U.S. oil exports in the last few months. Last Friday, these forces came together to cause the worst price drop in a month.  New York futures closed out last week at $36.79 and London closed at $38.67. This was a drop of 6% last week and 11% for New York futures since the high for this year’s rally was touched on March 22nd.

“U.S. production still is forecast to continue dropping this year, and output from several of the weaker oil exporting states continues to slip slowly.  However, Iran’s drive to increase exports and the massive oversupply which is filling storage depots around the world that continues to grow suggests that a fundamentals-supported price rebound is still some months away.

“Concerns are growing about five of the weakest oil exporters, known as the fragile five, which could easily suffer a political collapse and cease to export oil in the foreseeable future. These countries – Algeria, Iraq, Libya, Nigeria, and Venezuela – suffer from a variety of economic and geopolitical ills which could easily turn one or more into failed states unable to export much oil. These five countries are producing total of about 10 million of oil per day; have little in the way of other revenues; with the exception of Libya, do not have the large sovereign wealth funds that other oil exporters have accumulated in the last decade; and are currently selling much of their oil below the cost of production. Should one or more of these exporters collapse within the next two or three years, the global glut of stored crude could quickly be eliminated. If this is coupled with the coming impact of the massive reduction in capital expenditures by oil companies to find and produce more oil that is currently underway, oil prices could be at record levels before we are very far into the next decade.

“In the meantime, the situation in the U.S. oil industry continues to deteriorate. The latest concern is for the wellbeing of the banks that have loaned the billions of dollars to shale oil drillers in the last decade. Some foresee that the regional banks that have too much invested in oil could be in trouble before the year is out. It seems reasonably certain that many banks are going to cut the lines of credit for many smaller shale oil drillers in the next few weeks which could drive them into bankruptcy. Some 50 North American oil and gas producers have declared bankruptcy since early 2015.  However, these are mostly small firms that had accounted for only a tiny share of U.S. production and are having little impact on production. Many companies have continued to produce oil in the midst of bankruptcies as there is little marginal cost to keeping the oil flowing as compared to the expense of drilling and fracking new wells.

“The EIA reported last week that the costs of drilling new shale oil wells last year were 25-30% lower than in 2012. While some of this came from efficiencies such as drilling multiple wells from a single pad, much of the cost has come from major reductions in pay scales in what has become a buyers’ market.” 

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News items from OilPrice Intelligence Report editor Evan Kelly:

4/1: Bankrupt shale companies still producing. More than 50 oil and gas companies in North America have declared bankruptcy since early 2015, a figure that is expected to continue to climb. But according to a Reuters analysis, drillers that have already gone into the bankruptcy process have not slowed down their oil and gas production. Magnum Hunter Resources is one example. The company increased production over the course of 2014 and 2015, right up to the point of bankruptcy in December. Since then, its 3,000 or so wells continue to produce. Bankruptcy may even provide the company with more resources by allowing it to shed its debt load. The phenomenon makes sense given that creditors want to be paid as much as they possibly can, meaning that they want drillers to continue to produce even while in bankruptcy. At the macro level, however, zombie producers could result in a protracted rebalancing for the oil markets.

4/5: Rising oil prices could be good for the U.S. economy. Goldman Sachs published a new study that found that the prospect of rising oil prices could provide a boost to U.S. GDP through several avenues, including increased capex from the oil and gas industry as well as an improved trade deficit. The contrarian argument goes like this: oil production is more elastic than oil demand, meaning that when prices fall, the industry curtails production by more than consumers increase their demand. The effect is that a dip in production is made up through higher imports, which hurts the U.S. trade balance. Consumers still win, but the overall U.S. economy takes a hit. The counterintuitive conclusion suggests that the U.S. economy may actually prefer higher oil prices. 

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.