Oil Prices are most Definitely Heading to the Upper US$30s
Oil prices hit their lowest levels since mid-November last year, with WTI entering a bear market, and analysts now see the price of oil sliding further down to below US$40 and even into the US$30s, as rising output from Libya and Nigeria adds to the persistent concerns over global oversupply.
As of 2:21pm EDT, WTI Crude had tumbled 3.11 percent to US$43.05, while Brent Crude had plunged 2.79 percent at US$45.60.
According to analysts, the slide will continue, and oil prices could drop to levels they hadn’t seen in more than a year.
“Oil is in a downtrend and risks trending into the $30’s,” Paul Ciana, a technical strategist at Bank of America Merrill Lynch, said in a note on Tuesday, as quoted by Business Insider.
Oil prices have now dropped to the levels they traded before OPEC and 11 non-OPEC producers agreed to a production cut deal in an effort to kill the glut and push prices up. The nine-month extension to the deal, until March 2018, failed to lift oil prices, with analysts and traders questioning if OPEC’s cuts have had or would have an effect on global supply, given the US shale resurgence, rising output from other producers that are not part of the deal, and increased production within OPEC, where exempt Libya and Nigeria, and non-complying Iraq, have recently increased output.
Like BofA, Fereidun Fesharaki, chairman of oil and gas consultancy FGE, on Monday said that oil prices could plunge to US$30 a barrel in 2018 and maintain that low price for some two years, if OPEC fails to make steeper output cuts.
Oil prices are “most definitely” heading to US$40 and are likely to slip into the upper US$30s, John Kilduff, founding partner at energy hedge fund Again Capital, told CNBC’s Squawk Box on Tuesday.
“The future might be bright for oil prices but the present is not,” Tamas Varga with London-based broker PVM told FT. Any immediate price gain would be “wishful thinking”, according to the analyst. – Tsvetana Paraskova
$40 Oil Prices In The Near Future
Despite a busy week in oil news, oil prices are hovering around the mid-$40s mark as inventories remain high and production from OPEC members Libya and Nigeria ramps up.
• The EIA downgraded its oil production forecasts for this year and next in its most recent Short-Term Energy Outlook, largely due to the OPEC agreement.
• But the EIA said that the OPEC agreement could boost oil prices later this year, which would end up spurring new output from U.S. shale.
• Ultimately, that would lead to a small inventory build in 2018, and likely a ceiling on price increases. EIA predicts Brent prices to average $56 per barrel in 2018.
Oil prices broke fresh seven-month lows on Tuesday, with WTI dropping below $44 per barrel and Brent dipping below $46. Renewed and heightened pessimism over the pace of rebalancing has sunk in as OPEC is struggling to induce inventory drawdowns. U.S. shale continues to grow production and Libya is also adding large volumes of supply back onto the market at the worst possible time. The North African OPEC member is now producing 900,000 bpd and is aiming to top 1 million barrels per day by next month.
Most oil companies adjusting to “lower for longer.” The Wall Street Journal reports that most in the oil industry are resigned to low oil prices for years to come, recognizing that a range of $50 to $60 might be a semi-permanent equilibrium. After going through rough waters in the early part of the downturn – between 2014 and 2015 – which saw the bankruptcies of an estimated 105 oil producers and 120 oilfield service companies, the survivors are settling in to turn a profit at today’s prices. Some drillers are actually hoping that oil prices do not return to $100 per barrel for fear of sparking another boom and bust.
Oil hedging “turned on its head.” Oil producers are no longer hedging their production because oil prices have fallen too much. As a result, major consumes are the ones now doing the hedging. Bloomberg reports that options prices are now being driven by airlines and shippers hoping to lock in cheap fuel. “This is a significant shift in the relative producer-consumer hedging behavior,” David Schenck, a cross-commodity strategist at Societe Generale, said in a note. “While consumers may try to lock in low oil prices, most producers will simply refuse to lock-in loss-making prices.”
Middle East conflict escalates. A flurry of security events took place in the Middle East on Monday, raising fears of an escalating political crisis that has been described as the worst in decades. Iran launched missiles into Syria, targeting ISIS. It was the first Iranian military attack in another country in three decades. Also, the U.S. shot down a Syrian government plane, a move that sparked a warning from Russia. Russia said any U.S. plane flying west of the Euphrates River would be treated as a target. Meanwhile, Saudi Arabia said it has detained three members of Iran’s Revolutionary Guard Corps, which it says was approaching the Saudi offshore oil field of Marjan. The events come as tensions have spiked over the suspension of diplomatic relations with Qatar. There is a lot going on, but for now, the oil markets are shrugging off the tension. In the past, events like these would cause an immediate price spike of a few dollars per barrel. With the market so oversupplied these days, traders are hardly worried about a disruption.
Saudi energy minister says market on course for rebalancing. Saudi energy minister Khalid al-Falih said that the oil market would rebalance by the end of the year, a prediction that is unchanged despite the recent downturn in oil prices. “Current expectations indicate the market will rebalance in the fourth quarter of this year, taking into account an increase in shale oil production,” al-Falih said. He dismissed the negativity in the market as irrelevant and the work of speculators. “Markets determine prices but are themselves driven by unpredictable variables beyond the control of producing nations…Short-term volatility is mostly a reaction to short-term factors … as well as the role of speculators in stock markets that increase market volatility.”
Bakken coming back, but shortage of workers hits industry. After laying off so many people, Bakken oil drillers are struggling to fill vacancies as they ramp up their drilling efforts. According to EE News, the biggest need is in trucking, although there are thousands of job openings. A worker shortage is one constraint that could hinder a rapid rebound in production.
Total to move forward with Iran deal. Total SA (NYSE: TOT) said that would go ahead with the development of an Iranian gas field, which would mark the first involvement of a major western oil company since Iranian sanctions were lifted. The $1 billion investment comes even as the U.S. government is considering harsher treatment towards Iran. “It is worth taking the risk at $1 billion because it opens a huge market. We are perfectly conscious of some risks. We have taken into account (sanctions) snap-backs, we have to take into account regulation changes,” Pouyanne said in a Reuters interview.
Frackers and conventional drillers collide. The WSJ reports that shale companies that are drilling much longer laterals are starting to collide with existing wells. As drilling proliferates, companies are starting to encroach on each others’ territory, an event now known as a “frack hit.” The situation is leading to rise in lawsuits. “It’s becoming a pretty sizable issue,” James West an analyst with Evercore ISI, told the WSJ. “I suspect every basin is probably facing the same type of challenge.”
U.S. oil companies frozen out of Russia. Sanctions from the U.S. on Russia are much more stringent than the sanctions from the EU, leading to an uneven playing field in Russia. European oil companies are moving forward with new projects will their American counterparts are locked out. – Tom Kool
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