January 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil broke off its year-end 2018 slide when ticking up by $1.85 (+3.7%), to $51.38 per barrel in January. The increase occurred within the context of a weaker U.S. dollar, the lagged impacts of an 119,000 barrel-per-day (BPD) rise in the amount of oil supplied/demanded during November (to 20.9 million BPD), and a gradual rise in accumulated oil stocks (monthly average: 442 million barrels). 

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From the 28 January 2019 issue of Peak Oil Review:

The main issue affecting prices remains the efficacy of the OPEC+ production cut vs. U.S. shale oil production and the slowing Chinese economy.  Last week a political upheaval occurred in Venezuela, raising the possibility that Caracas would no longer be able to export 500,000 b/d to the U.S. or that its production might fall below its current 1 million b/d level.  So far, the Venezuelan turmoil has not moved oil prices, but with the world's major powers lining up for or against the Maduro government, prices seem likely to be affected.

The OPEC Production Cut.  The International Energy Agency said last week that the OPEC+ cuts that started this month are likely to put a floor beneath oil prices, but that it would still take time before the reductions balance the oil market.  According to the latest edition of the IEA's monthly Oil Market Report, Russia produced 11.5 million barrels of crude daily last month and "It is unclear when it will cut and by how much."  Russia undertook to reduce its production by 228,000 b/d beginning this month, with the cuts to last until April, when OPEC+ will meet to review the results of its latest price-boosting effort.  However, Energy Minister Alexander Novak warned early on-and recently repeated-that it would be difficult for Russian producers to cut quickly and by a lot.  Recent reporting suggests that Russia's oil production was continuing to climb slowly in January.

OPEC and its allies do not rule out taking further action at their next meeting in April should oil inventories build up in the first quarter, OPEC's secretary general told Reuters.  "We remain focused on the supply-demand balance," Barkindo told Reuters TV at the World Economic Forum in Davos.  "Our challenge is to maintain supply-demand balance."

U.S. oil producers are trying to soothe OPEC's worries about losing market share, telling the group that investors in the U.S. firms want a reduction in growth and higher payouts.  With U.S. output approaching 12 million b/d, OPEC's forecasts and even U.S. government predictions have repeatedly underestimated U.S. shale oil growth.  The CEOs of Occidental Petroleum and Hess Corp, attending a session at the World Economic Forum in Davos, said that growth of U.S. shale oil output would slow.  The meeting was a rare occasion when U.S. shale oil producers and an OPEC representative, Secretary-General Mohammed Barkindo, sat on the same panel.

U.S. Shale Oil Production. All indications suggest that there will be a significant slowdown in the growth of U.S. shale oil production in 2019.  After growing by 1.6 million b/d last year, even the ever-optimistic EIA now is saying that growth will slow to 950,000 b/d in 2019 and to less than 500,000 b/d in 2020.  In its monthly Drilling Productivity Report, the EIA forecasts Permian oil production to grow by only 23,000 b/d from 3.83 million b/d in January to 3.85 million in February.  That would be the lowest rate of monthly growth the EIA has forecast for the Permian since September 2016.  Growth of oil production from the Bakken is forecast to be up by 9,000 b/d next month and Eagle Ford to be up by 11,000.

Industry insiders are saying much the same.  Continental Resources' Harold Hamm said that shale growth could decline by as much as 50 percent this year compared to 2018, although he added that it was just a "wild guess." Hamm said that a lot of shale E&Ps are trying to keep spending within cash flow.  Shares of oilfield service firm Halliburton fell sharply last week after the company forecast lower revenues in the first quarter.  Clients in North America, Halliburton's biggest market by revenue, began pulling back on some drilling services last year amid transportation bottlenecks in the largest U.S. production region and after oil prices slid sharply in the fourth quarter.

Of more interest is that capital raising by U.S. oil E&P companies has fallen sharply following the decline in crude prices, pointing to cutbacks in capital spending budgets and a continuing slowdown in activity.  The U.S. shale industry has relied heavily on debt to finance its growth, with E&P companies raising about $300 billion by issuing bonds during the past ten years.  As crude prices started to slide last October, that source of capital was choked off, with just three bond sales by exploration companies that month, and none at all since November.  For the time being debt and equity investors are encouraging oil producers to pursue cash generation rather than borrowing more to pursue growth.  Weak share prices have also been a deterrent to raising capital.

With the decline in the growth of U.S. shale oil production, the end of U.S. waivers on Iran, and the OPEC production cut, it seems likely that oil prices will be heading higher this year. The one event that could derail this scenario is more economic problems that would reduce the demand for oil this year. 

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Selected highlights from the 2 February 2019 issue of OilPrice.com’s Oil & Energy Insider include:

U.S. considers SPR release. The U.S. government is considering a release of oil from the strategic petroleum reserve (SPR), timed with potential outages from Venezuela. Venezuela has exported roughly 500,000 bpd to the U.S., and because of American sanctions, those volumes are now in jeopardy. The only problem is that the SPR does not contain heavy crude. Already the market for heavy oil is tight while that for lighter oil is much looser.

U.S. refiners looking for alternatives to Venezuela. U.S. refiners that import heavy oil from Venezuela are now looking for alternatives. Canada and Mexico have heavy oil, but have little scope to increase supply. “The region with the biggest shortfall of Venezuelan crudes, either through sanctions or inadvertently through further production declines is the U.S.,” said Michael Tran, commodity strategist at RBC Capital Markets, in a note. U.S. domestic medium and heavy sour grades, including Mars Sour, have seen their prices jump. “It’s nuts. Everything with sulfur in it is getting bid,” one U.S. crude trader told Reuters, referring to sour oil that is typically less desired. Valero, Chevron, and of course, Citgo, are the largest importers of Venezuelan oil.

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.