April 2017 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil inched up ($1.73 or 3.5%) in April, to $51.06 per barrel. The increase coincided with a weaker U.S. dollar, the lagged impacts of a 46,000 barrel-per-day (BPD) decline in the amount of oil supplied/demanded in February (to 19.2 million BPD), and a modest downturn in accumulated oil stocks (to 528 million barrels). 

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Tom Whipple, editor of Peak Oil Review, provided the following overview:

“Moscow says it now has cut production by the pledged 300,000 BPD. However, this cut was from an artificially high base and does not mean very much. Given that the Saudis have cut more than their required share, the 1.8 million BPD OPEC/NOPEC cut seems to be complete for now. Given the increases in oil production elsewhere in the last six months, there seems to be general agreement that the production cut will need to be extended until the end of the year.  Otherwise it will be a failure and oil prices will continue to fall. Some observers are saying that the production cut will need to be continued at least through the first half of 2018. For now, however, it seems that only a six-month extension will be agreed upon at a meeting later this month.

“A few analysts are saying that U.S. shale oil production is likely to increase at a faster pace than the EIA has been estimating. Rystad Energy expects U.S. shale oil output to grow by 100,000 BPD each month for the rest of this year and into 2018 if prices hold around $50-$55 a barrel.  This is considerably higher than the EIA projections that U.S. production will grow by about 29,000 BPD each month in 2017 and 57,000 BPD in 2018.  Should Rystad be closer to the mark, it would wipe out much of the OPEC/NOPEC production cut, forcing prices lower.  Lower prices, of course, would reduce the incentive for U.S. shale oil producers to increase production at the levels Rystad is projecting.  The U.S. oil rig count rose for the 15th straight time last week to 870 rigs or 450 more than at this time last year. The shale oil industry still has a lot of rigs in storage, so it seems likely that the U.S. rig count will continue to increase for a while.

“Looking beyond the current concerns about OPEC vs. U.S. shale oil production is the question of what the world's oil supply will look like in the next decade. Since U.S. shale oil production took off seven or eight years ago, the possibility of an imminent supply crunch or even peak global oil production has been dismissed by most observers.  However, worries about supply shortages due to the large decrease in oil industry capital expenditures again are being voiced by responsible observers. Last week we heard from Saudi Aramco and the International Energy Agency, both of which have voiced similar warnings in the past.  The IEA points out that worldwide only 2.4 billion barrels of new oil reserves were discovered last year and that the number of oil production projects receiving a final investment decision in 2016 was at the lowest since the 1940's.

“For now, major U.S. oil companies are looking at investing more heavily in shale oil where wells cost less than $10 million to drill and frack as opposed to the billions of dollars that large offshore platforms cost. A few outside observers of the shale oil industry are saying that large production increases cannot continue for much more than a few years. The days of spectacular production increases from the Bakken and Eagle Ford shale oil formations seem to be ending; however, the Permian Basin may still have a way to go. U.S. shale gas production in the Marcellus shal seems to be slipping already, undercutting optimism that U.S. shale gas will be powering the world in coming years.

“Global demand for oil is still on the order of 34 billion barrels per year and is likely to keep increasing by 400-500 million barrels each year.  While the subject of derision by many optimists, some form of peak oil still looks likely in the next decade from a combination of lower supplies, higher prices, concerns about climate change, or even new technologies.” 

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Selected news items from Oilprice.com Editor Tom Kool include the following:

* Lower inventories, higher refining runs…doesn't matter. U.S. refiners processed a record volume of crude oil last week, according to the EIA. With maintenance season over and refiners ramping up to meet summer demand, they are pulling crude oil out of storage. U.S. inventories dropped by 3.6 million barrels, the largest drawdown in quite a while. But that did very little for oil prices, which dropped sharply this week. One reason the data could be a little misleading: gasoline stocks actually jumped much higher, so all that refining is resulting in gasoline heading into storage.

* Goldman: high probability of OPEC extension. Goldman Sachs' head of commodities, Jeff Currie, said that OPEC is likely to extend its deal for another six months. That could result in WTI trading between $55 and $60 for the rest of this year, which is a "substantial upside, given we are trading at roughly $49.50" Currie said on Bloomberg TV.

* IEA: global oil discoveries hit record low. The IEA said on [April 27] that the oil industry discovered a record low amount of oil in 2016, logging just 2.4 billion barrels in new discoveries. Also, the volume of oil given final investment decisions in 2016 amounted to 4.7 billion barrels, the lowest level in 70 years. The result could be a supply shortage towards the end of the decade, the IEA warned. In fact, the IEA has repeatedly warned about the pending shortfall, which would lead to higher prices and much more volatility by 2020. 

* Libyan production restarts. Although there is conflicting news about what is going on in Libya, Reuters reports that several key oil fields in Libya are restarting operations, including the Sharara field that has a capacity of 300,000 BPD. That news could have been a big reason for the 1.6 percent sell off of WTI and Brent on Thursday. To be sure, there were separate reports that the Sharara field remained shut and Libyan production was still at a 7-month low at 490,000 BPD. Needless to say, Libyan production will likely seesaw for the foreseeable future, and conflicting reports will be likely.

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.