May 2017 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil fell back, by $2.57 or 5.0%, to $48.49 per barrel in May. The decrease occurred despite a weaker U.S. dollar, the lagged impacts of a 845,000 barrel-per-day (BPD) jump in the amount of oil supplied/demanded in March (to 20.0 million BPD), and a continued decline in accumulated oil stocks (to 510 million barrels). 

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“OPEC and non-OPEC members secured a nine-month extension of their [production-cut] deal,” wrote Oilprice.com Editor Tom Kool, “pushing the combined 1.8 million barrels per day in reductions through to the first quarter of 2018. The cohesion among the disparate members was notable, although the markets, hoping for a bullish surprise, were less than impressed. After hinting at deeper cuts or perhaps an extension through the middle of 2018, oil traders were left disappointed. There is evidence that hedge funds and other money managers built up a bullish position ahead of the meeting on the off chance that OPEC would surprise the market with more aggressive action. Once that was off the table, there was a selloff in crude positions. OPEC officials shrugged off the price drop, arguing that they can’t be concerned with daily price movements.”

Another contributing factor to the price decline was the Trump administration’s budget proposal to sell up to half of the U.S. strategic oil reserves during the next decade. 

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“Oil analysts expect that with the OPEC extension finalized, the drawdown in crude oil inventories will accelerate this year,” Kool continued. “The U.S. has already seen a drop off in storage, but the weekly declines could grow larger. Some traders, according to Reuters, predict that the drawdowns could jump as high as 10 million barrels per week, while those that are more cautious suggest declines on the order of 3 to 4 million barrels. ‘I think we'll easily get below 500 million barrels over the next six to eight weeks, or eight to 10 to be conservative,’ said Andrew Lebow, senior partner at Commodity Research Group. That would be down from the record high of 533 million barrels hit in March.”

On the other hand, argues Daniel Yergin, vice chairman of IHS Markit, the price drop between mid-2014 and the end of 2015 forced producers to become “more efficient, focused and innovative. A new well that might have cost $14 million in 2014 now costs $7 million. The gain in efficiency is so great that a dollar invested in U.S. shale today will produce about 2.5 times as much oil as a dollar invested in 2014.

“In 2014, many thought a drop in price to $70 a barrel from $100 would shut down U.S. production. It didn't. Today, new shale oil wells can be profitable at $40 to $50 a barrel, and some companies claim even lower. That makes possible a new surge in U.S. production -- as much as 900,000 additional barrels a day over the course of this year. By next year, the U.S. is likely to hit the highest level of oil production in its entire history.

“As drilling increases, tightness and bottlenecks are starting to become apparent in terms of manpower, supplies and equipment…[and] so oil prices will rise. But the entire business has been recalibrated to a lower price level. An industry that had become accustomed a few years ago to $100 oil now regards that as an aberration that will not recur absent an international crisis or a major disruption. The lessons about costs since the price collapse are not going to go away,” Yergin concluded. “They are too powerful to forget, and too painful.”

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.