April 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended its gain in April, rising by $3.21 (+8.6%), to $40.76 per barrel. The price increase coincided with a weaker U.S. dollar, the lagged impacts of a 625,000 barrel-per-day (BPD) increase in the amount of oil supplied/demanded in February (to 19.4 million BPD), and a modest increase in accumulated oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI widened slightly to $0.82 per barrel. 

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

Analysts are starting to wonder as whether 2016 could turn out to be similar to 2015 when oil prices rose sharply in the first five months of the year on hopes that the oil surplus would soon be over, and then collapsed in May when it became apparent that there was going to be more oil around than necessary. Last week the price surge which began in February continued through Thursday and then slowed on Friday leaving London futures at $48.13 at the close and New York at $45.92. The impetus for the surge is that that hedge funds and other speculators are convinced that the two-year price slump is over and that higher prices are ahead. This forecast is supported by the steady decline in the US rig count, which continued last week; a continuing drop in US crude production which the EIA projects will continue into next year; a weaker dollar due to the Federal Reserve's failure to increase interest rates; increased consumption of gasoline in the US due to low prices; market technical analysis showing prices breaking various "ceilings;" and news of a string of production outages across the globe due to insurgencies and unsettled economic conditions.

Most analysts and financial institutions are saying that the recent price increase of more than 70 percent since January has been too much too soon and that the fundamentals do not support such a rapid increase. They cite the increasing global crude stockpiles, both on shore and at sea, and the recent increases in oil production by Iran and the Saudis which is offsetting the drop in US shale oil production. While there are several geopolitical situations around the world which have reduced oil exports in recent months, most of these are of a temporary nature and are likely to be reversed shortly.

The US economy and that of the EU are growing rather slowly which is keeping the demand for distillates low.   The price of gasoline in the US has been rising in the last few weeks which will make it less attractive for discretionary travel. Chinese refiners are producing more diesel and gasoline than their country can consume, so the surplus is being dumped on the world market. Some see a gasoline glut currently developing.  While the massive cutbacks of capital expenditures on exploring for and drilling new oil wells will eventually have a major impact on the supply and price of oil, it is likely to be another year or two before the full impact is felt.

There are, however, at least three geopolitical developments that could drive prices sharply higher in the near term. These are the political/economic upheavals going on in Venezuela, Nigeria, and Iraq. Evidence is mounting that one or more of these countries could be engulfed by so much political turmoil in next few weeks or months that their combined oil production of nearly 7 million b/d would be affected. Oil stoppages on the order of millions of barrels a day would almost certainly drive oil prices much higher. As with most efforts to forecast oil prices, there are simply too many forces at work to come to a conclusion as to which just which forces will prevail, even in the short run. Over the next two years or so, oil prices will almost certainly be higher due the drop in investment and contraction of the industry. It is the timing of this increase where the uncertainty lies.

Last week saw much bad news from across the oil industry with profits plunging, credit ratings being reduced and workers let go. Particularly hard hit has been the oil services industry that makes its money supporting exploring and drilling operations which have been sharply curtailed. The economies of those states that have been benefiting from the shale oil bonanza are reporting souring economic conditions with loan delinquencies and bank losses on the rise. Offshore drillers are being hit particularly hard as the cost of producing deepwater oil in now well over $100 a barrel making the economics of starting new projects prohibitive. Last week, however, a new well was started off Uruguay in 11,000 feet of water setting a new record, but it is unlikely that many new deepwater wells will be started until prices recover back into the $100s. The IMF reports that Middle Eastern oil exporters are on track to receive some $500 billion less for their oil this year as compared to 2014. 

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News items from OilPrice Intelligence Report editor Evan Kelly:

There are early signs that the three-month rally in oil prices, up from a low of $26 per barrel in February, might be reaching its limits for the time being. Oil prices retreated at the start of the week as OPEC reported higher production levels. Iraq saw oil exports rise slightly, and there are rumors that Saudi Arabia is ramping up production in the wake of the failed Doha agreement. "There are enough supply stories out there to slow or temper any gains," Energy Aspects analyst Richard Mallinson told Reuters.

Also, from a technical trading standpoint, oil is facing fierce resistance at $48 to $50 per barrel. The sharp run up in prices is now staring down a “textbook retracement,” Todd Gordon of TradingAnalysis.com said on CNBC. Backing that up is the fact that hedge funds and other money managers have amassed a huge pile of net-long bets on crude prices. Whenever positions increase by such a large amount, the chances that the pendulum swings back in the other direction rises. In other words, because oil prices have rallied so quickly, there is a good chance that they will correct and fall back again.

Oil companies step up hedging. E&P companies are also not sure that the oil price rally is here to stay. When oil prices rose to $45 per barrel, a “flurry of dealing kicked off” according to Reuters, as companies scrambled to lock in prices for the rest of this year and next. 

IEA sees oil prices past the bottom. For its part, the Paris-based International Energy Agency believes that the worst is over for oil prices. Provided that the global economy fares well, oil prices should continue their upward trajectory, although in fits and starts. "It may well be the case, but it will depend on how the global economy looks like. In a normal economic environment, we will see the price direction is rather upwards than downwards,” the IEA’s Executive Director Fatih Birol told reporters on the sidelines of the G7 energy ministers’ meeting. "We believe under normal conditions towards the end of this year, second half of this year but latest 2017, markets will rebalance." At the same time, the IEA has consistently warned that today’s cutbacks in investment could set the markets up for a shortage several years from now. Birol and the IEA have cautioned the industry not to slash investment too much. "What we would like to see is, after a big decline in 2015 and 2016, there will be a rebound in investments (in 2017), and bringing (investments) to the level of $600 billion once again," Birol said.

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.