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The
monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose
by $4.60 (10.2%) in October, to $49.52 per barrel. The increase coincided with a
stronger U.S. dollar, the lagged impacts of a 411,000 barrel-per-day (BPD) increase
in the amount of oil supplied/demanded in August (to 20.1 million BPD), and a mid-month
rebound in accumulated oil stocks.
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Commentary
from ASPO-USA’s Peak Oil Review
editor Tom Whipple --
Oct
31: Oil prices trended down last week to register the biggest loss in six
weeks. At the close New York futures were at $49.27, down from $50.50 on
Monday, and London was trading at $50.03.
There was a brief rally during the week when US crude stocks came in lower
than expected, but the week's decline came mainly because traders lost faith
that OPEC will be able to reach agreement on a production freeze.
Last
month in Algiers, OPEC agreed to reduce crude production to a range of 32.50
million to 33 million b/d. Another meeting was convened last Friday in Vienna
to work out the details of the agreement which is to be confirmed by the OPEC
oil ministers on November 30th. The Friday meeting, however, ended in deadlock
as Iran and Iraq disputed the data being used to allocate production cuts. Both
countries plan to increase oil production in the coming year and are not
interested in cutting their production. Non-OPEC members met in Vienna on
Saturday and took no action to limit production. The Non-members agreed to meet
again before OPEC's November 30th meeting.
Talk
about a production cut has been going on since summer as various oil exporters,
including the Russians, hinted that they might be able to agree on a production
freeze to push oil prices higher. Futures speculators latched on to this talk
and drove up oil prices by some $10 a barrel in the last three months. In this
time there were a number of developments, such as a partial revival of
production in Nigeria, and Libya and an increasing US drilling rig count, that
combined increase world crude supplies even further. Several OPEC countries
always expected to be exempted from any production cut, because of their poor
economic condition and looked to the Saudis and the other Gulf Arab states to
carry most of the burden.
Many
market analysts consider the Algiers agreement to be a farce, intended only to
drive prices higher and increase exporter revenues without cutting much of
anything. It should be noted that oil
traders dealing with the supply and demand of the actual oil were always
skeptical that the futures price increase was justified, while speculators were
more optimistic that we would soon be seeing the good old days of $100 oil.
Many
observers expect the fall in oil prices to continue as OPEC + Russia seem to be
unable to come up with a formula that will share the burden of a production cut
equitably among the various exporters. Some are talking of prices falling to
$40 a barrel or lower in the next few months. One observer notes that there is
a backlog of some 5,000 drilled but uncompleted wells in the US. These are
likely to be completed quickly if oil prices increase to economic levels,
possibly re-imposing an oversupplied condition on the oil markets.
While
US shale oil production is forecast to drop by another 30,000 b/d in November
as current drilling is inadequate to keep up with depletion, this would be the
smallest monthly drop in a year and a half, a sign that the US shale oil
decline may be bottoming out. Some 70 US oil and gas companies filed for
bankruptcy in 2015 and 2016; however, these companies now still produce about 1
million b/d while bankruptcy proceedings continue. It is this situation that is
partially responsible for the failure of prices to rise much above $50 a
barrel.
Nov
3: Oil prices continued to fall this week, capped by a precipitous drop
after the EIA said US crude stocks had increased the most since record keeping
began in 1982. New York futures closed
Wednesday at $45.34 after sinking to a five-year low of $44.96. London closed
at $46.86. In October, London futures reached a one-year high of $53.73, and NY
traded at $51.93. Analysts, including Goldman Sachs, are now talking about
prices sliding into the low $40s soon. The bad news for oil prices kept flowing
in all week. In addition to the
14.4-million-barrel build in US crude stocks, OPEC production was reported as
reaching a record high of 33.8 million in October despite declines in Saudi and
Angolan production. Nigeria reported its output has recovered to 2.1 million
b/d; Libya has doubled its production since mid-September and is now producing
close to 600,000 b/d; Iraq pumped an additional 50,000 b/d; and Russian oil
production set another Post-Soviet record.
Amid these bearish reports, OPEC and other oil exporters continue to
fuss over production cuts. Even if an
agreement is reached at the OPEC meeting, few believe it will result in
meaningful cuts in oil production or that the two years of oversupply are
coming to an end.
The
head of the EIA announced that US crude production is expected to fall by
800,000 b/d this year, the first drop since 2008. While US production has been
dropping, the EIA has been forecasting production declines ahead of the curve.
There has been much discussion about the impact of "zombie drillers"
in the US. These are firms that have gone into bankruptcy but keep pumping out
oil just rapidly as before. Bankrupt US drillers are producing roughly 1 million
b/d, about the same as before bankruptcy. If these companies were actually dead
and not living on other people's money, US production would be considerably
lower and prices likely higher.
Analysts
are hailing the impending merger of GE with Baker Hughes as a stroke of genius
that will create the world's second-largest oilfield services provider. By
combining GE's strength in making state-of-the-art oilfield equipment with
Baker Hughes expertise in drilling and fracking, a stronger company could
emerge.
The
world's problems continue to bubble along. ISIL has torched numerous oil wells
creating a giant environmental mess around Mosul. The Maduro government is suggesting that
hungry Venezuelans living in cities should go outside and find some place to
grow their food. Fears are on the rise about the state of China's numerous
economic bubbles. Prices are surging, and the whole place looks right for a
major economic correction - or worse. The Russian economy seems on course for
another bad year in 2017 according to a former finance minister.
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Commentary
from
OilPrice Intelligence Report
editor
Evan
Kelly follows:
Oil
prices faltered in the second half of [the last full week of October], on
deteriorating expectations of an OPEC deal. Prices regained some ground on
Thursday following EIA data showing a surprise drawdown in crude oil stocks
after the market predicted an increase. Gasoline stocks also fell by more than
expected. Adding a bit more buoyancy to the market were comments from OPEC
officials suggesting that the cartel would be willing to cut production by 4
percent.
The
markets initially took the announcement as positive news, but in what has
become a familiar script from the oil cartel, the lack of details or hard
commitments ultimately meant the price impact wore off. OPEC is meeting today
and tomorrow to discuss the technical details of the Algiers accord, ahead of
its official meeting at the end of November. Investors should take every OPEC
utterance with a giant grain of salt, and wait to see what happens in a month's
time. WTI hovered slightly below $50 per barrel in early trading on Friday
(October 28).
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.
