May 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil hit its highest level since October 2015 when rising by $5.95 (+14.6%), to $46.74 per barrel in May. The price increase coincided with a slightly stronger U.S. dollar, the lagged impacts of a 64,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in March (to 19.6 million BPD), and a modest rollover in accumulated oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI was nearly nonexistent at $0.03 per barrel. 

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

There is still much disagreement as to where prices are going in the next few months. Having seen oil prices nearly double since late February, many do not see further increases in the immediate future.  The 1 million BPD Alberta production outage is being eliminated; exports from Libya are back to about where they have been in the last year or so; and while Venezuela is approaching societal collapse, so far its oil production has been holding fairly steady. In Nigeria, however, oil production continues to drop rapidly as a new generation of insurgents in the delta is tearing up more onshore oil production facilities every day.

While the price of oil remains murky for the next six months, many are beginning to talk about the impact of the massive reductions in capital spending on oil and gas exploration and development that has taken place in the last two years.  It is starting to sink in that if oil prices remain below $100 a barrel for the next few years and global demand remains in the vicinity of the 35 billion barrels a year, three or four years from now we are likely to see global production falling in the next decade. Discovery of new oil last year was at the lowest in 60 years and well below the rate at which it is being consumed.

The only real hopes for increased production, outside of the volatile and vulnerable-to-global-warming Middle East are shale and deepwater oil. Both of these sources are likely to become increasingly expensive to produce. While a few shale oil producers are claiming profitability at $50 a barrel, they currently are relying on temporary factors such as a backlog of already drilled wells; drilling only in the most productive sweet spots; and by forcing their service suppliers to do business at a loss. All this says that the outlook for shale oil in the next decade may not be as bright as many are forecasting. 

Deepwater projects will have problems in the next decade too. These projects are very expensive, technically complex, and take years to complete. Only the largest of the international oil companies have the resources to undertake deepwater drilling, which is only profitable if oil prices are well above $100 a barrel - some suggest $150. Today about 30 percent or 22 million BPD of global oil production comes from offshore. While these wells do not deplete as fast as shale oil wells, they do so at a much faster rate the conventional land wells. All this suggest that five years from now oil production may be dropping rapidly, and oil prices may be unaffordable for many. 

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News items from OilPrice Intelligence Report editor Evan Kelly:

Oil prices were hit with some bearish news [during the last week of May], as Canada is set to bring much of the more than 1 million BPD of oil production that was disrupted from wildfires back online. But optimism is rising in the oil markets.

Is $60 around the corner? Even with that crude coming back online, there is a growing bullishness pervading the markets as of late, as forecasters raise their price projections and speculators gamble on steadily higher prices. Bloomberg reports that speculators shorting crude oil have been squeezed out of the market, and short bets have fallen to their lowest levels in almost a year. The shift in trades reflects more and more confidence that oil will not fall back down, at least not to the depths seen earlier this year. Also, several banks, including Standard Chartered Plc and SEB Bank have come out and said that oil will hit $60 before the end of the year. UAE's economic minister, Sultan Bin Saeed Al Mansoori, said on Monday that he could see oil hitting that threshold by summertime. A survey conducted by The Wall Street Journal found that the array of investment banks polled raised their price targets for Brent crude in 2016 by $2 on average in May compared to the previous month's forecasts.

Not everyone is so bullish, however. Some analysts attribute the recent price gains simply to the supply disruptions in Canada and Nigeria, outages that were always going to be temporary (at least in the case of Canada). "The output disruptions are a key factor supporting prices at the minute. We don't think prices will go much further from here," Thomas Pugh of Capital Economics told Reuters. "In fact, we think prices are vulnerable to a downturn in the short term if some of the disrupted supply returns, or there is evidence that higher prices are stimulating more production." Even with the upward revisions, many are still cautious - the average projections polled by the WSJ expect oil to trade at only $48 per barrel in the fourth quarter. 

New drilling possible. The rig count fell again last week, but with oil prices hovering around $50, market watchers are looking for clues to see if shale drillers will get back to work. Pioneer Natural Resources (NYSE: PXD) recently said that it is considering redeploying rigs if it grows confident that prices will stay above $50. But the WSJ reports that the oil majors could be more cautious, having been burned by megaprojects that cost tens of billions of dollars in recent years. "We're not going to try and get into a boom and bust," BP's CFO, Brian Gilvary, said in April. "We wouldn't be looking to significantly ramp [activity] up" even if oil prices rose to $60. The oil majors do operate in U.S. shale basins, but also source much of their oil and gas from large-scale long-lived projects. That means they won't move as nimbly as smaller shale drillers as oil prices rebound.

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.