March 2017 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil retreated ($4.14 or 7.7%) in March, to $49.33 per barrel. The decrease coincided with a weaker U.S. dollar, the lagged impacts of a 745,000 barrel-per-day (BPD) drop in the amount of oil supplied/demanded in January (to 20.0 million BPD), and a new record of nearly 540 million barrels of accumulated oil stocks. 

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Crude prices rebounded sharply during the last week of March, erasing nearly half the $7-8 selloff that began early in the month. “The March price drop came on the consensus that increasing crude inventories and ever higher rig counts would offset the 1.8 million production cut that OPEC was trying to orchestrate,” wrote Peak Oil Review Editor Tom Whipple.

The change in market sentiment was due to several factors, Whipple continued. “The dollar was somewhat weaker; the OPEC/NOPEC production cut seemed to be on course for complete implementation and extension for another six months; disruptions in Libya which cut oil production by about 250,000 BPD; and a U.S. stocks report showing a larger-than-expected decline in gasoline and distillate stocks. Even though U.S. crude inventories continued to climb in the week ended March 24th and the U.S. rig count continued to grow, the markets concluded that the various reports indicated higher oil prices ahead.

“Despite trader enthusiasm, the Director of the IEA said last week that he does not expect a major increase in global oil prices despite the 1.8-million-barrel supply cut. The IEA bases its judgment on the extraordinary size of the global oil glut, and the likelihood that any substantial price increase would bring more oil from the United States, Canada, and Brazil to the market. The backlog of shale oil wells that have been drilled but not yet fracked continues to grow as oil producers hold wells out of production awaiting higher prices. Many of these wells have been drilled only to meet contractual obligations to drill within a specified time or lose the lease.”

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Oilprice.com Editor Tom Kool provided several forward-looking news items:

* Fracking techniques continue to improve. The Wall Street Journal reports that shale drillers such as EOG Resources continue to tweak their drilling techniques, finding ways to become more efficient. EOG is using software that gathers data while drilling a well, which can be used to make directional drilling much more precise. The upshot is that shale drillers could end up producing more oil at lower prices, and could do so for years to come. That would undermine the influence of OPEC over the long-term and make global supplies more flexible to marginal changes in prices and demand.

* Oil traders warn of oversupply. Even as some argue that shale could be a long-term phenomenon, some of the world's largest oil traders are cautioning against too much reliance on short-cycle projects in Texas. At the FT's Commodities Global Summit, two executives from Mercuria Energy Group and Trafigura Group said that the market could see a supply crunch towards the end of the decade because of a shortage of investment today. That echoes a warning from the IEA in early March. "The low-hanging fruit on the short-cycle projects are being used now so I am more in this camp that says we are starting to see potential issues three or four years down the track," co-head of group market risk and former head of crude trading at Trafigura Group Ltd., told the audience.

* IEA: price rally not significant even with OPEC extension. The head of the IEA cautioned investors against expectations of a substantial price rally even if OPEC extends its cuts for another six months. Huge inventories will weigh on the market and new non-OPEC supply would come online if prices moved too high.

* PetroChina to increase spending. One of China's oil giants will increase spending for the first time in five years. PetroChina said it would increase spending by 11 percent this year in a bid to boost production. China's state-owned oil companies have been hit hard by the oil price downturn, with a few of them posting record low levels of profit. China's oil production has declined as a result of the downturn in spending, with output down more than 5 percent last year.

* Russia to comply with OPEC agreement. Russia along with a handful of other non-OPEC countries, pledged to cut their output by nearly 600,000 bpd between January and June, with Russia accounting for about 300,000 bpd of cuts. Russia reiterated its intentions to meet those promises. "The decrease in production in January and February were ahead of tempo with regards our initial plans. Currently, in March we have already reached a reduction level of 200,000 barrels a day. We anticipate complying with the figure set forth in the agreement by the end of April," Russian energy minister Alexander Novak told CNBC. Meanwhile, the minister said that Russia's long-term production profile will increasing come from the Arctic - Russia gets 17 percent of its output from the Arctic, but that figure will rise to 26 percent in 20 years.

* Permian pipeline constraints. Output in the Permian Basin is rising so quickly that the region could bump against a shortage of pipeline capacity. As a result, the discount between Midland oil, a benchmark for oil from West Texas, and WTI, has widened. Permian production is expected to rise to 2.65 million BPD by the end of the year, but pipeline capacity might only reach 2.54 million BPD.

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.