October 2016 Monthly Average Crude Oil Price

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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.