Wednesday, August 16, 2017
On Tuesday, oil markets demonstrated how conflicted oil fundamentals are and how oil prices are consequently flailing about. On the bearish side, the U.S. dollar rallied for a second consecutive day on an easing of U.S.–North Korea tensions. “The dollar index, which measures its strength against a basket of six major currencies, climbed 0.4 percent on Monday and was up 0.3 percent[yesterday. In addition, an announcement by the Nigerian subsidiary of Royal Dutch Shell that it had lifted a force majeure on light crude exports” signaled increased global supply.
Speaking of rising global supply, there are three factors that surpass Nigeria in significance: (1) a major production recovery in Libya, (2) faltering compliance with output cut agreement commitments (in July, OPEC members were at 75 percent compliance and their non-OPEC partners were at 67 percent) and (3) strong production gains by shale oil companies. Regarding the latter, in its latest Drilling Productivity Report, the EIA projects that U.S. shale oil production will increase by 117,000 barrels per day in September, the ninth consecutive monthly rise and “the sixth straight month the EIA has forecast production growth above 100,000 bpd.” Not surprisingly, the Permian Basin will account for 64,000 bpd of the 117,000 bpd gain. Lastly, Rystad and consultancy Wood Mackenzie both expect that Permian output will rise by 300,000 bpd in the second half of this year. In light of WTI price sinking to $42 per barrel in mid-June, it may seem odd that shale oil production is currently surging. However, remember that price signals don’t affect drilling right away and there is a four to five-month lag between languid rig counts and weaker output.
There are some significant bullish fundamentals currently in play as well. Due primarily to robust U.S. refining activity and moderate crude import levels, domestic crude stockpiles have experienced substantial weekly draws over the last couple of months. This has furthered OPEC’s goal of reducing excess global inventories by bringing developed nation stocks down to the five-year average. They have enjoyed much success lately, but they have a long way to go (over 200 million barrels), the U.S. summer driving season is drawing to a close and autumn refinery maintenance will commence in the near-term, which “typically brings with it a seasonal drop in refinery demand and resulting build in crude stocks.”
Another bullish factor is “oil demand growth accelerating in the past few months in both emerging and developed economies, due to strong economic growth.” IEA recently increased its 2017 oil demand growth forecast from 1.4 million bpd to 1.5 million bpd. However, all is not hearts and flowers. This week Reuters reported that “a slowdown in Chinese refining activity growth in July cast doubts over its crude demand outlook [in months ahead. Crude oil processed last month was] 0.4 percent higher than a year ago, but down about 500,000 bpd from June.” This fallback is likely related to a glut of refined products. Lastly, on the supply side, traders are already becoming concerned that “demand growth may once again be overcome by supply next year” (Bloomberg) when the OPEC/non-OPEC output cut agreement expires.
Energy fuels prices settled mixed yesterday. WTI crude decreased 4 cents to $47.55, Brent crude rose 7 cents to $50.80, gasoline gained slightly to end at $1.58 and heating oil dropped half a penny to $1.60.