High stocks and continued oversupply mean oil price has further to drop

The underlying and driving fundamental remains that there is an oversupply and oil stockpiles are still increasing. Certainly oil exploration has taken a hit with the drop in oil prices and will – eventually – lead to lower production. Certainly the growth of shale oil production in the US has slowed. But the decline in some of this production has only been to turn off the most expensive production rigs. The oversupply has hardly been affected. Industrial growth has not yet picked up enough to balance this oversupply.

Oil price has been relatively stable for over a month at around $60 per barrel and all the talk from Saudi Arabia and the Gulf is about a stabilisation at this level and a recovery of oil price in the second half of 2015.

MarketPulse:

Saudi Arabia’s oil minister said on Wednesday he expected oil prices, which hit a near six-year low in January, to stabilize, signalling cautious optimism about the market outlook. Giving a speech in the German capital, Ali al-Naimi also urged non-OPEC producers to help balance the oil market, saying it was not up to Saudi Arabia to subsidize higher-cost producers and that circumstances required non-OPEC to cooperate.

“Going forward, I hope and expect supply and demand to balance and for prices to stabilise,” Naimi said. “Global economic growth seems more robust.” The comments are a further sign OPEC’s top producer is sticking to its policy to defend market share. Last month, Naimi signalled satisfaction with developments, saying he saw oil demand growing and that markets were “calm”. Oil was trading just above $60 a barrel on Wednesday, up more than 30 percent from a near six-year low close to $45 on Jan. 13.

ABS CBN:

World crude prices are expected to gain this year or at least stabilise at between $50 and $60 a barrel, Kuwaiti Oil Minister Ali al-Omair was quoted as saying.

“Forecasts for the oil price this year indicate that it will gain or at least stabilise between $50 and $60 a barrel,” the official KUNA news agency quoted Omair as saying late on Saturday in Bahrain. The minister said prices are currently supported by conflict in Iraq and Libya and by a drop in sand oil and shale oil output. But that is counterbalanced by slow global economic growth, which is dampening demand, Omair said.

World prices dropped at close on Friday as the dollar rose sharply, making dollar-priced crude more expensive for buyers using weaker foreign currencies. West Texas Intermediate for delivery in April slid $1.15 to $49.61 on the New York Mercantile Exchange, ending near its week-ago level. Brent North Sea crude for April, the international benchmark, dropped 75 cents to $59.73 a barrel in London.

But there is a large element of wishful thinking here. The January price of around $45 per barrel was just testing the waters that we will probably see again later this year. According to “data released by the Energy Information Administration (EIA) shows that crude inventory is sitting at an 80-year high with the United States recently recording its biggest weekly inventory rise in 14 years. Crude inventories are now sitting at 444.4 million barrels, which is more than a year’s worth of production”. Storage capacity in the US is now utilised to 60% compared to 48% at this time last year.

Global economic growth may provide some demand growth in the second half of 2015 and it is possible that oil price will remain at between $50 and 60 for most of the year. But I think it is more likely that we will see another dip to around $40.

US crude oil stocks March 2015 source EIA

US crude oil stocks March 2015 source EIA

 

 

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