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The
monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil edged
lower in February, decreasing by $1.47 (-2.3%), to $62.23 per barrel. The retreat coincided with a modestly stronger U.S. dollar, the lagged impacts of a 196,000
barrel-per-day (BPD) drop in the amount of oil supplied/demanded during December
(to 20.1 million BPD), and a gradual rise in accumulated oil stocks (to 426
million barrels).
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Oil
prices fell sharply last week ending up at $61.25 in New York and $64.37 in
London. A higher than expected increase in crude stocks and gasoline was the
impetus for the decline. An unexpected
decline in Chinese economic activity, likely due to the winter holiday, did not
help the outlook for oil nor did President's Trump's announcement of new
tariffs and the remark that "trade wars are good, and easy to win"
did not help the outlook for oil prices. U.S. oil production and the oil-rig
count continue to climb slowly. Talk in Washington of crippling new sanctions
on Venezuela which would likely remove still more of its oil from the export
stream did not help the situation.
The
price setback may be only temporary as the market has become enthralled with
the current pace of production increases by the U.S. shale oil industry. Many
observers are saying that the demand for oil will remain strong into 2020 when
the growing electric vehicle industry could start eroding the demand for oil.
This projection assumes that the global economy stays healthy for the next few
years despite numerous voices sounding alarms.
The
OPEC Production Cut: The cartel produced 32.28 million BPD in
February -- a reduction of 70,000 BPD in comparison to January. The February
output was the lowest since last April. The carefully watched compliance with
the November 2016 agreement rose to 149 percent in February, jumping five
points from January. Some are saying the job of balancing the market is not
complete. Even though international oil prices in January topped $71 per
barrel, they fell below $64 for a short time last week. Much of the drop in
supply was due to the UAE which for the past year has been slow in keeping up
its part of the agreement.
U.S.
Shale Oil Production: U.S. drillers
increased the rig count to 800 for the first time in almost three years. The
pace of drilling has grown in an almost-unbroken streak since the beginning of
November signaling even bigger production jumps yet to come. Between 2010 and
2015, annual U.S. oil production grew by four million BPD. Production dropped
due to the lower prices in 2016, but then rose by 1.2 million BPD between
January and December 2017.
In
its 2018 Annual Energy Outlook, the EIA makes three projections as to what will
happen between now and 2050. In the most
likely "reference" or middle case U.S. oil production climbs from the
current 10 million BPD to 12 million and stays close to this level for the next
32 years. The low case has production peaking around the current level and then
wilting away to 7 or 8 million BPD by 2050.
In the high, or wildly optimistic, case, U.S. oil production climbs and
climbs to around 19 million BPD three decades from now.
The
Reference case projection which assumes that oil finding and drilling
technologies will continue to improve as they have in recent years has come in
for sharp criticism as it is seen as the official U.S. government projection as
to where our oil production is going. The heart of these criticisms is that
except for the Permian Basin, other U.S. shale oil fields have already peaked
or are unlikely to grow significantly. U.S. offshore production currently is
not receiving enough investment to grow significantly.
This
rapid growth leaves the Permian as America's hope for energy dominance. The
basin, which has been producing conventional oil for nearly 100 years is
currently producing about 2.9 million BPD up from less than 1 million ten years
ago. The EIA estimates that oil production from the Permian is currently
growing by about 75,000 BPD each month with 258,000 BPD from newly opened wells
outpacing the monthly decline of about 183,000 BPD from older wells.
Critics
are saying that this rate of increase is unlikely to last. Drillers are
concentrating on a finite number of productive sweet spots which will not last
for the next 30 years. Costs are rising rapidly so that an increasing number of
wells will be losing money. Finally, outside analysts who have examined oil
production from the Permian closely say that these expensive "new
technologies" do not increase the amount of oil extracted from each new
well, but only get similar amounts of oil out faster. The amount of oil that
will ultimately be recovered from each well remains about the same depending on
the quality of the location that is drilled.
The
course of production from the Permian over the next few years may be key to
what happens to the U.S. and even world oil production. If drillers cannot come
up with some 180,000 BPD of new production each month then production will
start to decline. The state of the U.S. economy over the next few years will be
another factor with higher interest rates adding a heavy burden to an industry
which has been operating at a loss for a decade.
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Oil
prices fell sharply at the close of the week, as the EIA reported a
larger-than-expected build in crude oil inventories, while gasoline stocks also
rose. Meanwhile, the surprise announcement that the Trump administration was
planning harsh tariffs on imported steel led to a broad selloff in financial
markets, particularly those in the industrial sector - with negative
implications for commodities. An early morning tweet from President Trump,
arguing that "trade wars are good, and easy to win," doesn't bode
well for global equities and commodities.
U.S.
considers crippling sanctions on Venezuela. Venezuela is set to hold presidential elections on
April 22, but because it is widely regarded as a rigged affair, the U.S. is
gearing up for another round of
sanctions
on the struggling South American nation. No decision has been made, but among
the measures could be a ban on Venezuelan oil imports into the U.S., a ban on
U.S. diluent to Venezuela, a ban on oil tanker insurance, or some combination
of those options, perhaps in several waves. Any/all of these sanctions would be
crippling to Venezuela, which is already expected to see a decline of oil
production by several hundred thousand barrels per day this year. U.S.
sanctions could lead to wider losses.
ExxonMobil
makes another Guyana discovery.
ExxonMobil (NYSE: XOM) and its partner, Hess Corp. (NYSE: HES),
announced
its seventh major oil discovery in the Stabroek block off the coast of Guyana
after it drilled the Pacora-1 exploration well. The well, according to the
companies, will included in the third phase of development, which will
ultimately lead to more than 500,000 bpd of new supply.
Exxon
quits Russia joint venture. After
years of limbo, ExxonMobil decided to call it quits on its joint venture with
Russia's Rosneft, after initially pulling back following U.S. sanctions on
Russia in 2014. Rosneft warned it would lead to "serious losses" for
the oil major, but welcomed Exxon's return if the "legal possibility
arises," Reuters
reports.
In 2014, Exxon was forced to end work just weeks after it and its Russian
partner made a major discovery in the Russian Arctic.
OPEC
to meet with shale companies. The
Secretary-General of OPEC, Mohammad Barkindo, plans on meeting with shale
executives on Monday in Houston, the second year the group's leader has done
so. "One of the lessons learned from this oil-price cycle is that as
producers we are all in the same boat," Mohammad Barkindo told
Bloomberg
in an interview. The meeting will be held on the sidelines of the CERAWeek
Conference in Houston, a widely attended event from industry executives and
policymakers from around the world.
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.
