Global Oil Market Developments
By Behrooz Baik Alizadeh
In the week ending on January23, 2015, crude oil prices rebounded partially. During that week, it was announced that the US drillers have significantly cut rig counts. According to Baker Hughes, the US rig count had declined by 209 over six weeks. Therefore, the market did not rule out the possibility of witnessing further fall in oil production in the near future.
The International Energy Agency (IEA) has announced that production growth rate in non-OPEC countries will decline. The agency estimated non-OPEC oil supply to decline by 350,000 b/d. It was the first time since July 2014 that the IEA has cut its estimate for non-OPEC production. The projections for lower production drove the prices up.
Meanwhile, President of the European Central Bank (ECB) Mario Draghi launched a government bond-buying program which will pump hundreds of billions in new money into a sagging Euro zone economy.
The ECB said it would purchase sovereign debt from this March until the end of September 2016.
Together with existing schemes to buy private debt and funnel hundreds of billions of Euros in cheap loans to banks, the new quantitative easing program will release 60 billion Euros ($68 billion) a month into the economy.
This mechanism has been worked out to curb deflation and recession in the Euro zone, but a better economy in the 19-nation zone is widely expected to benefit the prices.
During the week leading to January 23, 2015, oil prices remained under pressure due to supply glut. A 10.1-million barrel increase in the US crude oil inventories had impact on the crude oil prices. While the US refineries had reduced their operations to 85.5% of their capacity – the lowest since April 2013 – the US crude oil stockpiles topped 379.9 million barrels – the highest since May 2014. Crude stocks at the Cushing, Oklahoma delivery hub, rose 2.9 million barrels. Even the US gasoline stocks hit their highest level since February 2011.
During the above-mentioned week, the Money Manager (Speculative) category for NYMEX (WTI) Crude, net speculative length (combined futures and options contracts) decreased 11.2% from the previous week of 244,032 futures and options contracts to 216,704. That further contributed to weaker prices.
In the following week ending on January 30, crude oil prices edged up a bit. During that week, cold weather in the US caused higher demand for heating fuel and the crude oil prices rallied. Meantime, dollar depreciation boosted oil prices.
Oil companies were said to be planning a decline in their investment. Chevron said it would invest $35 billion in 2015, down 13% from the previous year. Such a drop in investment has been unprecedented since 2003. Baker Hughes still announced that 94 drilling rigs were shut down during that week. The number of drilling rigs in the US fell to their three-year low of 1,223. That strengthened the possibility of production fall in the US; therefore, the oil prices got a boost. It was speculated that Saudi Arabia intends to help stabilize the prices in cooperation with non-OPEC oil producers. To that effect, Saudi oil minister Ali al-Naimi is expected to meet with Russia’s Ambassador Oleg Ozerov, Finland’s Ambassador Pekka Voutilainen and Norway’s Ambassador Rolf Willy Hansen.
However, the market still maintained that oversupply was piling up pressure on oil prices. Even OPEC Secretary General Abdalla Salem el-Badri announced that the market faces a 1.5 mb/d oversupply. Under these circumstances, increased crude oil inventories in the US pressured the oil prices. According to the US Energy Information Administration (EIA), the US crude oil stocks increased to 406.7 million barrels, up 8.87 million barrels which was the highest since August 1982. Oil production the US reached its three-year high of 9.21 mb/d. Crude stocks at the Cushing, Oklahoma delivery hub, rose 2.09 million barrels to hit 38.9 mb/d.
A Bloomberg survey indicated that OPEC had raised its production during that week. According to Bloomberg, OPEC’s January production reached 30.905 mb/d, up 483,000 b/d month-on-month.
During that week, the Money Manager (Speculative) category for NYMEX (WTI) Crude, net speculative length (combined futures and options contracts) decreased from the previous week to 216,325 futures and options contracts. That further contributed to weaker prices.
In the week ending on February 6, crude oil prices kept rising and the OPEC basket price managed to soar past $50 a barrel for the first time since last June. United Steelworkers members who help run crude terminals at a California port embarked on the biggest oil workers’ strike since 1980, when a work stoppage lasted three months. United Steelworkers represents more than 200 refineries, oil terminals, pipelines and petrochemical plants in the US. Trade sources had said that the strike could cut fuel production in the US by 64%. As a result, crude oil prices jumped. The strike managed to disrupt 10% of US refining capacity up to the middle of that week.
The terrorist Islamic State of Iraq and the Levant (ISIL) attacked oil facilities in Iraq’s oil-rich city of Kirkuk and brought a halt to oil production at Khabbaz oil field located southwest of Kirkuk. Khabbaz produced 10,000 b/d oil and its production capacity could reach 15,000 b/d. ISIL militants had already seized the oil field for some time before losing its control to Iraqi government forces.
Some oil institutes believed that the slide in oil prices have affected oil production in the US because many oil wells in that country would produce losses if oil sells below $60 a barrel. These institutes held out the possibility of a halt in the US oil production in the second half of 2015. British Petroleum (BP) announced that it steer clear of any new investment, pushing oil prices higher. The dollar also gained ground and it contributed to higher crude oil prices. By the end of this week, the market still imagined that this oil price jump would be short-lived because the market fundamentals did not change tangibly and the market was oversupplied.
The impacts of fall in oil production in some parts of the world due to less drilling and investment could not be pushed into bold relief quickly. Estimates indicated that the oil market would face a 1.5 to 2 mb/d oversupply in the first quarter of the current year.
During the week leading to February 13, 2015, crude oil prices continued to rise. At the beginning of the week, negotiations with striking US oil service workers were announced to have failed. That was when anxieties about oil shortage in the US affected the prices.
During that week, Baker Hughes announced that 83 drilling rigs in the US stopped operating and the US rig count fell to 1,140, the lowest since December 2011. Oil and gas service company Weatherford International said it has been forced to axe 5,000 jobs during the first quarter of the year. Earlier, Schlumberger Limited, which is the world’s largest oilfield services company, announced job cuts.
The Organization of the Petroleum Exporting Countries sharply revised down its estimate for non-OPEC oil production in 2015. According to OPEC estimates, non-OPEC oil production stood at 850,000 b/d, down 420,000 b/d from the previous estimate. In the OPEC estimate, the US accounts for the highest amount of cut in non-OPEC production (130,000 b/d). The IEA also said that the US would be producing 200,000 barrels of oil below projections.
Loading on oil tankers in Iraq’s Basra terminal was halted due to bad weather conditions with 20 tankers waiting for 13 days. The trading advisory firm Petromatrix announced that bad weather could cut Iraq’s February oil exports by 1 mb/d. The Iraqi oil ministry announced that Iraq’s January oil exports were down 14 percent from December.
Libya’s oil production was reported to have fallen by 150,000 b/d in January and reached 300,000 b/d, the lowest since June last year.
These news items boosted oil prices.
Despite growing oil prices, market analysts still estimated that the crude prices would fall again. Citigroup predicted that oil would lose half of its value in trading in the second quarter of the year to reach $20 a barrel. Lower rig count in the US does not mean that the market oversupply would disappear. This institute predicted that the market would face a 700,000 b/d oversupply in the first quarter and an 800,000 b/d oversupply in the second quarter of 2015.
According to EIA, crude oil stocks in the US have increased by 4.87 million barrels; therefore, the US crude inventories have reached their all-time high.
During that week, the Money Manager (Speculative) category for NYMEX (WTI) Crude, net speculative length (combined futures and options contracts) shed 4,230 from futures and options contracts and pushed them down to 216,704 contracts. That indicated that they are not optimistic about future price hikes.