Oil prices are mostly lower heading into this morning’s U.S. trading session with the complex heading for the third weekly loss in a row. Over the last three weeks the spot WTI contract has lost about $6.50/bbl of its value as the bottom pickers once again seemed to have thrown in the towel on the rebalancing trade. The market has not been able to sustain any significant recovery rally as global supply continues to outstrip demand with more supply likely on the way when sanctions are released on Iran.
Scanning the media airwaves this morning one sees more indications of robust supply. For example Reuters is reporting the following supply items
Nigerian Bonny Lt and Quo Iboe crude exports expected to increase in January
Iraq may increase oil output further in 2016, although less dramatically then in 2015
An oilfield in southwest Iran is expected to be operational by March, 2016
On the other side of the equation there are no reports or announcements of cutbacks in supply in the short term. With the OPEC meeting just two weeks away and with the OPEC basket price at about the lowest level since the downturn began in June of 2014 there will be a growing contingency that will be questioning the merits of continuing in the current market share strategy.
There is no question that the longer the low price environment lasts the higher the probability that the global oil market will eventually work its way into a more historical and normal supply and demand balance. But that is a long time into the future. In addition even when the global oversupply situation dissipates due to more costly fields throttling back production a balanced global market will result in higher prices than today and the higher cost fields will once again begin to produce.
It is one thing for OPEC to say yes we have captured additional market share from non-OPEC countries but at what cost? Compared to where the OPEC basket price was back in June of 2014 OPEC has lost over $680 billion dollars due to low oil prices… which is not nearly being offset by the extra oil that OPEC is producing. OPEC may never be able to recover the revenue drain experienced since June of 2014.
In addition the capturing of market share by OPEC is likely to be only temporary as prices go higher non-OPEC production in places like the U.S. will once again return to a strong growth curve and another market share/lower price battle could possibly begin again. The current OPEC strategy is a flawed strategy in that as a group they really can’t control global oil events in a way that meets the revenue needs of all of their member countries.
Market share battles are only effective if the battle results in a permanent shift in market share from one sector or company to another. The current OPEC strategy appears likely to only be a temporary reallocation of market share and not one that will be a permanent shift. Non-OPEC producers like the U.S. are not going to shut-in all of their producing operations anytime soon. In fact the low price environment has actually resulted in a significant improvement in efficiency and reduction in producing costs in the main shale operating regions of the U.S.
Not that it is a long term trend but it seems that the strong decline in rigs deployed to the U.S. oil sector may have actually started to stabilize over last several weeks with EIA reported production increasing over that timeframe. Since the week ending Oct. 22 total WTI crude oil production has actually increased by 70,000 bpd with production still about 2 % above where it was for the same week last year. Certainly production is not surging as it was in a higher price environment but even with oil prices around $67/bbl below the level they were at when the downturn began in June of 2014 total crude oil production is still above the level it was at last year.
In addition to the production side of the equation global oil inventories are at record high levels with OECD stocks around 3 billion barrels as reported last week by the IEA. In the U.S. alone total combined stocks of crude oil and refined products are at a record high level of 1.305 billion bbls or about 214 million barrels above the five year average level for the same week. There is simply a significant amount of oil in inventory that will continue to compete with new production going forward which will result in a cap on any potential price rally that is not driven by absolute and substantial cuts in global production.
Global equities gained ground over the last twenty four hours and are setting up for a weekly gain. The Index improved by 0.7 % over the last twenty four hours with the year to date performance for the Index moving into positive territory for the first time since mid-August. Paris remains at top of the leader board but only marginally above China while Canada holds the bottom spot as oil prices approach new lows. Global equities have been a positive price directional driver for the oil complex this past week.
I am maintaining my oil view and bias at neutral even as the market still seems to be in a mode of trying to discount anything bearish and totally embracing anything bullish. Even though I have adjusted my view the global surplus still exists and there is still a possibility that oil prices can retest the lows made several weeks ago.
I am adjusting my Nat Gas view and bias back to cautiously bearish as the market remains oversupplied and inventories are now at a new record high level for this time of the year with a lower demand an El Nino winter looming ahead.
Markets are mostly lower heading into the U.S. trading session as shown in the following table.