July 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil retreated in July, falling by $4.11 (-8.4%), to $44.65 per barrel. The price decrease coincided with a slightly stronger U.S. dollar, the lagged impacts of a 62,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in May (to 19.2 million BPD), and essentially no change in accumulated oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI right-sided in July -- i.e., Brent’s price was $0.30 per barrel higher than WTI. 

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

“Oil prices fell steadily during July as the realities of oversupply trumped traders' hopes that there would be balanced markets and higher prices later this year.  July opened with London trading just below $51 a barrel and New York around $49.50. By month's end, London was down to $42.71 and New York to $40.74. The month's trading was dominated by reports of increasing oil product inventories and higher OPEC production. The decline of nearly $10 a barrel naturally has had repercussions across the oil industry. For most of July, the U.S. rig count was growing as drillers anticipated that crude prices would soon be at a level where more wells would be profitable. By month's end, however, these hopes had been dashed, and the U.S. oil rig count had nearly stopped growing….

“For the immediate future, most analysts are talking about further price declines with a few predicting $30 oil again. The issue of space to store excess oil is being discussed more frequently. As the summer driving and cooling season draws to a close, oil stockpiles traditionally increase. Now with both a growing oil and oil product glut, reports of more crude and oil products sitting around on tankers continue to increase. With only the OECD countries making an effort to track how much oil there is in storage, this leaves the actual storage situation in much of the world, especially Russia and China, an unknown.  If oil prices are depressed to an unexpectedly low level in the next year, the lack of storage space may be the cause.

“While high-cost U.S. shale oil production may be jumping up and down with prices and the willingness of investors to pump money into unprofitable shale oil drilling companies, production in much of the world remains strong. In low-cost conventional oil producing nations, such as in Saudi Arabia, the Gulf Arab states, Iraq, and Iran, there is determination to keep pumping to maintain market share. [Or, in the case of Saudi Arabia, at least, perhaps a desire to get oil out of the ground “while the getting’s good.”] So much has been invested in the large and very expensive deep-sea production platforms that there is little incentive to stop work, so considerably more oil is expected to be coming from these projects in the next year or so no matter what oil is selling for.  There are at least 15 large-scale offshore projects expected to come online in the next year producing a combined 1.6 million b/d of crude. This is enough to offset outages in unstable producers and to meet anticipated increases in demand.

Click here to read the rest of Whipple’s article. 

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Commentary and some news items from OilPrice Intelligence Report editor Evan Kelly follow:

“July saw the worst monthly loss for oil prices so far in 2016 and crude started off August right where they left off in July: oil prices sank 4 percent on Monday. WTI and Brent sank on Monday, briefly dipping below $40 per barrel before closing just above that key psychological threshold. The price declines technically pushed oil into bear market territory.”

Speculators grow more pessimistic. Hedge funds and money managers increased their short bets on crude oil, and sold off their long positions. In fact, hedge funds increased their short bets for the week ending on July 26 by the most ever. "The flow is solidly bearish," Tim Evans, an energy analyst at Citi Futures Perspective, told Bloomberg. "It reflects a recognition that the market is, at least for the time being, oversupplied." John Kilduff, founding partner of Again Capital, says oil is going to $35.

Shale drillers won't return until $60. Bloomberg reports that despite the nascent rebound in the rig count, many top shale drillers won't return to the shale patch in a big way until oil prices rise to $60 per barrel. That is a safer price zone than the $50 per barrel that many had signaled they would be willing to live with. Bloomberg cites Pioneer Natural Resources (NYSE: PXD) as a prominent example of a company that was previously waiting for $50 per barrel before deploying rigs, who has now said they actually are going to wait until oil rebounds to $60. Other companies targeting $60 per barrel include Anadarko Petroleum (NYSE: APC) and Hess Corp. (NYSE: HES). Many companies have been burned several times, including last summer when a rally to $60 per barrel was followed by eight months of falling oil prices. This time around, they are going to be more cautious instead of reflexively returning back to the oil patch to drill once oil rises to $50 or even $55 per barrel.

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.