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Oil Crashes Into $40’s As Hedge Funds Sell Off

Oil Barrels

Oil prices fell fast on Friday afternoon as traders see the rising rig count as yet another sign that the markets are still grossly oversupplied.

(Click to enlarge) 

Friday, April 21, 2017

Oil is heading for its largest weekly drop in over a month as doubts resurfaced over OPEC’s resolve. That comes despite the highly optimistic comments from top officials from Saudi Arabia and Kuwait. There seems to be a growing consensus within OPEC in favor of an extension of the deal. But the one holdout could be Russia, without which an extension is uncertain. Russia’s energy minister Alexander Novak was guarded when asked about Russia’s support for an extension, declining to take a position while citing progress that has already been made in the reduction of oil stocks. "The situation has gradually been improving since the beginning of March," Novak said to reporters.

Goldman says ignore the crude selloff. Oil was down sharply over the past few days, but Goldman Sachs tried to reassure the markets, saying that there is no evidence to justify the price declines. The investment bank tells investors to keep their focus, pointing to ongoing declines in crude oil inventories, drawdowns that are expected to pick up pace this quarter. Goldman says this week’s price declines of about 4 percent were driven more by speculative moves than the fundamentals. As a result, prices should firm up.

Gasoline stocks rise unexpectedly. Goldman says there is nothing to worry about, but the U.S. EIA reported an unexpected increase in gasoline stocks last week, raising fears of softer-than-expected demand. The stock build sent a shudder through the oil market this week. “If there’s too much gasoline, then refineries turn off and that’s bad for crude. This is the first week it has really been a concern,” Sam Margolin, an analyst at Cowen & Co., told the WSJ.

Russia drilling in the Arctic, making technological progress on its own. The FT reported on Russia’s foray into the Arctic, describing the persistence from the state and the government owned-Rosneft to go it alone on some of the most complex oil projects in the world. International sanctions put on Russia back in 2014 were thought to prevent Russia from accessing the capital, drilling technology and expertise needed to tap oil in the Arctic as well as in Russian shale. But, the FT reports that sanctions have forced Russia to make progress on its own. Related: Oil Prices Crash Below $50 On Oversupply Fears

Global inventories falling. Oil inventories are declining around the world even as they remain near record highs in the U.S. OPEC compliance is high and the drawdowns are evidence that the OPEC deal is finally bearing fruit. But the market is still uncertain if the cuts will be enough to sufficiently drain stockpiles.

Glut of oil in North Sea. Brent futures have dipped into a contango, a warning sign that the Atlantic region is suffering from more supply than expected. The time-spreads could force oil onto floating storage if it widens further. "It will not take much before we see headlines about floating storage starting to increase again," Olivier Jakob, head of oil consultant PetroMatrix GmbH, told Bloomberg. The pricing structure suggests that the market is still oversupplied.

Global downstream sector suffering under flood of Chinese exports. China has overbuilt refining capacity, leading to an overabundance of gasoline and diesel in the Chinese market, pushing up refined product exports, according to the WSJ. The flood of gasoline and diesel from China is squeezing refining margins and inflicting pain on refiners around the world. The “structural over-capacity in Chinese refining” could keep a lid on crude oil prices.

Exxon gives XTO leeway to do its thing. ExxonMobil (NYSE: XOM) is taking an unusual approach to its shale drilling unit, allowing XTO Energy, which is wholly owned by Exxon, to proceed with drilling in the Permian Basin with little oversight from corporate headquarters. Bloomberg reports that Exxon’s top brass is exempting XTO from much of the corporate bureaucracy in order to allow its drillers to move nimbly in the shale patch. “The top-down and heavily structured approaches they use on megaprojects—building a liquefied gas export complex or pumping crude that lies miles beneath the sea surface—won’t work with shale,” Bloomberg reported. Exxon recently paid $6 billion for a large swath of acreage in the Permian Basin in southeast New Mexico.

U.S. oil and gas industry entering “new cycle of expansion.” The rig count was up by 40 percent in the first quarter compared to a year earlier, employment is up by 9,000 people from its low point, drilling permits are up, and crude oil prices are much higher. These ingredients are creating a “new cycle of expansion” for the U.S. oil and gas industry, according to Texas Petro Index. Related: Oil Prices Fall Further As U.S. Rig Count Inches Higher

Dutch court investigating Exxon and Shell. A Dutch court ordered an investigation into a joint venture by ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A) for potential criminal responsibility for causing earthquakes at the Netherlands large Groningen natural gas field. The earthquakes have damaged buildings in the Groningen province.

UK set to see first 24-hr period without coal since dawn of industrial era. The UK’s National Grid said on Friday that the UK was in the midst of a 24-hour period without any coal-fired electricity, the first day without coal since the Industrial Revolution began more than a century ago. The UK government says it will entirely abandon coal by 2025. The increased use of natural gas and renewables are replacing coal.

Venezuela rocked by unrest. Caracas has ground to a halt amid the “mother of all protests” this week. Venezuela’s economy has been in a spiral for a few years now, but the political crisis has deteriorated more recently. Hundreds of thousands have taken to the streets to challenge what they view as the President trying to establish a dictatorship. Venezuela has emerged as a serious downside risk to global oil supplies because of the unrest.

By Tom Kool for Oilprice.com

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  • Naomi on April 21 2017 said:
    The Earth's core is made of iron carbide. Carbon leaches to the surface in an endless supply. Economic activity has peaked as the current supply of humans is not worth the food they eat. On balance we have enough petroleum until the surplus of humans is depleted.
  • Unconvinced on April 21 2017 said:
    Not sure I agree with the reasoning implicit in this article. A commodity's price in the medium to long-term is set by the price which generates a suitable return on capital for the highest cost incremental unit. Unless the Saudis can produce 100 Million BOPD the price WILL return to a level that makes the incremental high cost barrel profitable. Just for starters factor in:

    1) 6% pa global declines rates (ie 6% of the global production base has to be replaced each year - typically with progressively higher cost of production supply)
    2) no drop in global demand
    3) a virtual CAPEX freeze for 24 months
    3) a fracked production base in the US which is 1) less than 3% of global production 2) largely the unsustainable result of zero cost debt capital and 3) has been high-grading it portfolio for 18 months at least
    4) a product priced in a massively expanding currency base

    and you have a number powerful drivers for a return to material higher nominal & real prices.
  • Andrew Redford on April 21 2017 said:
    It seems like OPEC is losing the ability to set the price. Any supply cut seems to be absorbed by the US shale oil. I'm sure there will be ups and downs but the price looks to be heading lower over time. If OPEC cut too much and drove the price his temporarily it would just speed the increase in new oil wells. Also, the technology the US developed to get oil shale hasn't really been used in any other places yet.
  • Timmie Tee on April 21 2017 said:
    This is probably the last time we see oil in the 40s during this cycle, and this dip will shake out the last of the speculative longs. The lag in deep-well exploration and the unsustainable bump from shale creates an excellent buying opportunity. Inventory will balance this summer, and we will see 60s by EOY.

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