August 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil was unchanged at $44.65 per barrel in August. The price stability occurred despite a slightly weaker U.S. dollar, the lagged impacts of a 631,000 barrel-per-day (BPD) increase in the amount of oil supplied/demanded in June (to 19.8 million BPD), and a slight increase in accumulated oil stocks. 

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Commentary from ASPO-USA’s Peak Oil Review editor Tom Whipple:

“The markets have become volatile of late with traders reacting to nearly every API or EIA report and every utterance from the Saudi or Iranian oil ministers. Last week the markets were pressured by numerous comments pro and con the possibility of an oil production freeze; a jump in Chinese diesel exports; comments by Federal Reserve Chair Janet Yellen that there could be a price-depressing rate increase sooner-rather-than-later; increased exports from Iraq via Kurdistan; the possibility of a ceasefire in Nigeria; sluggish U.S. and Chinese economies; and a jump in U.S. crude and oil product inventories.

“All this nets out to nobody-knows-where-prices-are-going, but several analysts say that prices will trade in the $42-$50 range for a while. Some forecasters see a risk to the downside for a while, but everybody believes 2017 will be much better as the effects of massive cuts in capital spending take hold. The U.S. Commerce Department cites reduced spending by the energy industry as one of the reasons that the U.S. economic growth was lower than forecast in the first half.

“With a month to go before the Algiers meeting that is to consider a production freeze, we are likely to see continued posturing from the various oil exporters. All would like to see higher prices, but none seem willing to give up customers and market share to achieve this goal, preferring that the cuts be left to others.  In the meantime, the political situation in the Middle East continues to get worse…and the Chinese economy that has been the world's major growth engine for several decades continues to sputter.” 

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News items from OilPrice Intelligence Report editor Evan Kelly follow:

Oil price volatility "here to stay." Top oil executives do not see an end to the volatility in the oil markets for the foreseeable future.  "The volatility is here to stay," ConocoPhillips CEO Ryan Lance said. The ongoing process of adjustment to oil supply and demand "will extend into 2017. The inventory levels are still quite high." Other oil executives agree. Martin Bachmann, the top official from Wintershall AG's exploration and production unit for Europe and the Middle East, said that "[t]here will be a rebalancing. Over what timeframe is the big question." He went on to add, "[b]asically, volatility is the word."

A return to sub-$40 oil? "While we see high probability of some 80 to 90 percent of a return to $39 WTI, we also feel that achievement of this objective could still be some four to five weeks away," said Jim Ritterbusch of the oil consultancy Ritterbusch & Associates.

Strong rebound next year. While some analysts are concerned that oil could dip again in the short run, Bank of America Merrill Lynch says that oil is set for strong gains in 2017, expecting WTI and Brent to rise to $70 per barrel. BofA Merrill Lynch says that the oil market will flip from glut to deficit next year, with demand outstripping supply by as much as 800,000 barrels per day. Francisco Blanch, head of global commodities research at BofA Merrill Lynch drew a parallel with the 2010 rally, which saw strong price gains amid a supply deficit. In 2010 oil surged to the mid-$90s per barrel because of the supply shortfall, but Blanch says that the potential for tighter monetary policy could keep oil prices from reaching that level this time around.

Oil discoveries continue to plummet. In 2015 the oil industry logged new discoveries that represented just one tenth of the annual average dating back to 1960, Bloomberg reports. This year could be even worse as the industry slashes spending on exploration. The figures come from a new Wood Mackenzie report, which found that only 2.7 billion barrels of new oil was discovered in 2015, and only 736 million barrels have been discovered so far this year. The poor results raise questions about the industry's ability to bring enough supply online to meet future demand.

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.