Oil Bulls Tripped, and Russia + OPEC May Increase Production Soon

Here's 2 items which I would like to bring to your attention, in combination.

It seems the increasingly loud calls by stampeding oil bulls for $100+ oil prices have hit a few hiccups recently.  And oil prices may cool down a bit.  Unless oil traders get jacked up again on too many pots of coffee and restart their over-optimistic buzzing again, but that's another story.

Meanwhile, Russia + OPEC may decide to increase their collective oil production shortly by 10% or so.

Looks like oil prices may be getting ready to cool down a bit.

So, surprisingly, my repeated comments, over and over again, that I've been hoping for an average of $65 oil this year may actually become close to reality.  Will wait and see.

Anyway, first up, here's an opinion piece on Financial Times (paywall article, "Fair Use" extract)

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The surge is over — why $50 oil is now more likely than $100

"The spring fever is passing. After three months on the rise the oil market has turned. In a single day on Friday the price of a barrel of Brent crude fell by 2.5 per cent while the US benchmark crude — West Texas Intermediate — was down by 4.5 per cent.

The market is now set for a further fall as the hype and speculation that led to the increase is replaced by a cold return to fundamentals.

A Martian watching the oil market from outer space during the past few months will have noticed one thing above all else. There is no shortage of supply and no imbalance of supply and demand. Any shortfalls in production from places such as Venezuela have been easily covered by production from elsewhere, not least the US where output continues to grow month by month thanks to the continuing shale revolution.

The run-up in prices was driven by politics. Some traders came to the conclusion that supplies were going to be disrupted by war in the Middle East between Saudi Arabia and Iran or between Israel and Iran. This was fuelled by rhetoric on both sides and by President Donald Trump’s disavowal of his predecessor’s deal with Iran over its nuclear ambitions. The traders began to speculate on what they thought might happen next and the price rose. ..."

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^ Great analysis.  Tip of the hat to the author Nick Butler, and to Financial Times for posting Nick's opinion piece.

Next up, here's an article from Reuters:

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Oil output could return to October 2016 level, says Russia's Novak

"A return to the oil production levels that were in place in October 2016, baseline for the current deal to cut output, is one of the options for easing curbs, Russia’s energy minister said on Saturday.

Sources said this week that Saudi Arabia and Russia were discussing raising OPEC and non-OPEC oil production to ease 17 months of strict supply curbs amid concerns that a price rally has gone too far.

... Oil prices have risen to $80 per barrel, levels unseen since late 2014. Russian President Vladimir Putin said on Thursday that the price of $60 “suits Russia”.

... “I think the output reduction will not be as significant as many expect,” RIA news agency quoted Novak as saying when asked if he agreed with an estimate that the sanctions could remove as much as 800,000 barrels a day from the market.

“Some 10 percent is probably the maximum level,” he said."

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So in summary, it seems a correction may be underway.

My own opinion is that $65 oil is about right - not too high to hurt the global economy, and not too low to hurt oil producers.

Just my opinion; as always, you are free to disagree.

 

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How can they with a straight face say that there is no shortage of supply? On average, the last 8 years we have seen a build of 34 millions barrels in Q1 for OECD countries. This year we have seen a withdraw of about 34,9 million. This implies a supply deficit of (34+34,9)/90days= 0,765m b/d. When we also take into account that on average we had a build of 0,117m b/d in the period of 2009-17, the implied deficit is 0,65m b/d.

The stock change from the end of Q1 17 to the end of Q1 18 also implies a deficit of around 0,65m b/d. To compare, the implied surplus from Q1 14 to Q1 16 was about 0,61m b/d(and that made the oil price fall below $30). 

We know that non-OECD accounts for about half of the world demand. So if(and thats a big if) they have the same trend in oil storage, the implied deficit is 1,3m b/d. 

 

For these calculations I have included both oil products and governtment controlled stock. IEA data.

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