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The
monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil posted
a fourth month of gains when rising by $5.71 (+9.8%), to $63.86 per barrel in April.
The increase occurred within the context of a marginally stronger U.S. dollar, the
lagged impacts of a 258,000 barrel-per-day (BPD) drop in the amount of oil
supplied/demanded during February (to 20.2 million BPD), and an expansion in accumulated
oil stocks (monthly average: 461 million barrels).
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Recently
there have been numerous reports that the mostly unprofitable U.S. shale oil
industry is having trouble raising money to expand operations and does not
expect to be increasing production as fast as in the past. The recent U.S. drill rig count shows that
number of rigs drilling for oil and gas has fallen by 9 percent since the
November peak. Some believe that the
increasing presence of the integrated and well-financed major oil companies,
such as Exxon and Chevron in the U.S. shale oil industry will be enough to
offset declining production from the smaller shale oil drillers. However, other major oil companies such as
Shell and BP have said that they do not share the enthusiasm for U.S. shale
oil. Some are saying that the reason
major oil companies are becoming more deeply involved in the Permian stems from
a compulsion to keep growing their oil output and that shale oil is the fastest
way to increase production these days no matter the cost and long-term
prospects.
U.S.
commercial crude oil inventories have been rising in recent weeks. However, they have been increasing less than
usual for this time of the year mainly due to lower demand from U.S. refineries
which have been undergoing extended spring maintenance to be ready for the
winter gasoline blends and the new low-sulfur requirements for marine fuels
which come in force on January 1st. Last
week, a contamination problem in Moscow's 1 million BPD pipeline into Europe
forced a 10 percent cut in Russian oil production. Some are saying it could take weeks or months
to rectify this situation.
Given
that developments in Iran and Venezuela seem likely to lower the world's oil
supply by 1 million BPD and the civil war in Libya and the insurgency in
Nigeria could conceivably shut in another 500,000 to 1 million BPD, it seems
probable that oil prices will be higher later this year.
The
OPEC+ Production Cut: OPEC's oil
supply hit a four-year low in April due to declines in sanctions-hit Iran and
Venezuela and output restraint by Saudi Arabia.
A month ago, with international oil prices moving steadily upward
towards $80, it seemed possible that the Saudis and the other Gulf Arabs would
agree to increase production in 2H2019.
In April, Moscow signaled OPEC and its allies could raise oil output
after June because of improving market conditions and falling stockpiles. Now with prices sliding back to circa $70 a
barrel and Russia facing a multi-billion-dollar loss due to its oil
contamination problem, the situation has become cloudier.
Last
week Saudi Energy Minister al-Falih told the RIA news agency that the global
deal on oil production could be extended to the end of 2019. The minister did not specify whether, or by
how much, output levels could change after June. His comments came after President Trump said
he had called OPEC and told the group to lower oil prices, without specifying
to whom he spoke or whether he was referring to previous discussions with OPEC
officials.
The
parties to the OPEC+ 1.2 million BPD oil cut meet on June 25-26 to decide on
whether to extend the agreement. Oman's
Energy Minister al-Rumhy said last Wednesday OPEC, Russia, and other producers
would be looking to extend their oil output cut agreement when they meet. U.S. Energy Secretary Perry met last Thursday
in London with Saudi energy minister al-Falih and IEA Executive Director Fatih
Birol, the same day the U.S. sanctions waivers expired for eight importers of
Iranian oil. "Secretary Perry
remains actively engaged with his counterparts from the world's major oil
supplying nations and remains confident in the ability of these nations to
offset any potential disruptions in global energy markets," the DOE said
in a statement after the meeting.
U.S.
Shale Oil Production: After a pause,
the EIA resumed estimating that U.S. shale oil production continues to climb,
this time by 100,000 BPD in the week ending on 26 April. We shall have to wait until the end of June
before actual figures rather than estimates are available. Oil production in the lower 48 was up by 1.6
million BPD in the three months from December to February compared with a year
earlier. However, growth is down from
more than 1.8 million BPD in August-September and is slowing significantly for
the first time since 2016. The EIA continues to forecast that U.S. crude
production will rise by around 1.4 million BPD this year and 0.7 million BPD in
2020.
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The
oil price rally ended this week, with rising U.S. inventories and production
scaring away the bulls. Crude stocks soared by 10 million barrels and U.S.
production rose to 12.3 million BPD in the last week of April. "Even with deep
losses in supply from Iran and Venezuela, as well as a few other countries
around the world, OPEC+ will still need to hold back production to balance the
market," SEB analyst Bjarne Schieldrop said in a note
Iran
warns OPEC is about to collapse. Iran's oil minister said that OPEC may fall
apart. "Iran is a member of OPEC for its interests and any threat from
member states won't go unanswered," Bijan Namdar Zanganeh
said, referring
to Saudi Arabia's apparent coordination with the U.S. on Iran sanctions.
"I told [OPEC Secretary-General Mohammad] Barkindo that OPEC is in danger
by the unilateralism of some members and the organization faces the risk of
collapse." Last year, Qatar quit OPEC, but it would be a much more
significant development of Iran were to exit.
OPEC
production hits four-year low. OPEC production fell to a four-year low in
April, according to
Reuters. Declines in Venezuela and Iran were largely to
blame. The cartel's collective output stood at 30.23 million BPD, down 90,000 BPD from
March and the lowest since 2015. "The Iran sanctions come on top of
already fragile supplies and raise concerns about tightening markets,"
Norbert Ruecker of Swiss bank Julius Baer said.
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.
