February 2018 Monthly Average Crude Oil Price

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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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From the 5 March 2018 issue of Peak Oil Review:

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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From Oilprice.com’s 2 March 2018 issue of Oil & Energy Insider:

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.