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What If The Oil Rebound Never Happens?  

The IEA’s September Oil Market…

Why Did Oil Prices Just Jump By 27 Percent In 3 Days?

Why Did Oil Prices Just Jump By 27 Percent In 3 Days?

Oil prices have posted their strongest rally in years, jumping an astounding 27 percent in the last three trading days of August.

While much of the recent price movement defies reason and is enormously magnified by speculative movements by traders to take and cover their bets on oil, still, there were a series of rumors, events, and fresh data that helped contribute to the spike.

For example, on August 31, the oil markets woke up to the news that Russian President Vladimir Putin will meet his counterpart from Venezuela to discuss “possible mutual steps” to stabilize oil prices. The meeting will take place in China on September 3. Venezuelan President Nicolas Maduro has already called for an emergency meeting of OPEC, a call that has fallen on deaf ears, at least in the most important country of Saudi Arabia.

It is still highly unlikely, but the one country that might be able to change the minds of Saudi oil officials is Russia. Again, even if Russia promised to cut back oil production to boost prices (which it has not shown a willingness to do), Saudi Arabia has little trust in Moscow to follow through on those promises. Similar understandings to cooperate in the past have fallen apart, making coordinated action unlikely. Related: Sun Edison’s Stock Has Been Slammed. Is the Sell Off Justified?

Moreover, it is not at all clear that Russia’s best move is to cut back on production. Sure, it wants higher oil prices, but selling less oil will arguably offset price gains. And the depreciation of the ruble has cushioned the blow of low oil prices – Gazprom just reported a 29 percent gain in net profit for the second quarter compared to a year earlier, largely due to a weaker ruble. So, Russia is eager for oil prices to rebound, but the Kremlin is not as desperate as Venezuela.

Yet, bringing Russia to the table was enough to raise the prospect of OPEC production cuts, at least for oil traders, which bid up the price of oil on August 31.

Adding to the speculation was a new OPEC bulletin, which included a commentary about the state of the oil markets, entitled, “Cooperation holds the key to oil’s future.” Most of the article was unremarkable analysis about rising oil demand, but the article concludes with this:

“Cooperation is and will always remain the key to oil’s future and that is why dialogue among the main stakeholders is so important going forward. There is no quick fix, but if there is a willingness to face the oil industry’s challenges together, then the prospects for the future have to be a lot better than what everyone involved in the industry has been experiencing over the past nine months or so.” Related: We Could See An Economic Collapse As Debt Defaults Pile Up

In all likelihood, that is a throwaway line paying lip service to collective action, with no substance behind it. But the oil markets saw a glimmer of hope in a reevaluation of the group’s strategy, possibly portending a production cut. No doubt the Venezuela-Russia meeting added fuel to that speculation. Oil markets, as irrational as they are, don’t need confirmation to bid up prices. Oil prices jumped by more than 8 percent on the last day of August.

But another major reason that oil prices shot up at the end of August was due to very significant revisions by the EIA on U.S. oil production data, pointing to sharper contraction than was previously assumed. The EIA released new survey-based data, which is more accurate than their mere estimates based on extrapolation, and the new data showed that between January and May, the U.S. actually produced 40,000 to 130,000 fewer barrels per day than the agency previously reported. Then, in June, oil production dropped by 100,000 barrels per day from the month before, hitting just 9.3 million barrels per day (mb/d).

The largest downward revision came from Texas, which has been producing 100,000 to 150,000 fewer barrels than previously reported for the first half of this year.

To put that in perspective, consider the agency’s own weekly data, which comes out every Wednesday, and although it is less accurate than the retrospective looks, oil prices move up and down in response to the results. In its weekly data, the EIA shows U.S. oil production above 9.5 mb/d through the middle of July. For the week ending August 21, the EIA says the U.S. is producing 9.33 mb/d, above what the agency now says the U.S. produced in June. Related: Oil Prices Tank Over Mediocre Chinese Economic Data

In other words, for several months the oil markets had believed the U.S. was producing much more oil than it actually was. Instead of continuing to climb through much of the spring and leveling off into the summer, oil production actually peaked in April and has declined consistently since then. When the EIA released this latest revision on August 31, oil prices shot up.

Finally, although probably not quite as important as the OPEC rumors and the EIA data revisions, Canada suffered some outages at its oil facilities that could lead to a disruption in supplies. Canadian Oil Sands had to shut down production of its synthetic crude oil facility after a fire damaged equipment. And Nexen Energy, an oil producer in Canada and subsidiary of China’s CNOOC, had to close 95 pipelines after inspectors found problems with them. Neither company offered specifics on what the disruptions mean for their production levels, but if the outages persist, they could cut down on supplies. Canada’s benchmark for synthetic crude rallied on the news.

Citigroup analysts think the recent rebound is overdone, calling it a “false start,” and the 27 percent gain in just three days was “driven by a misread of market data and financial headlines.” Indeed, the largest three-day price rally since 1990 was driven by headlines, but given the severe volatility and huge price swings, oil prices are not trading on the fundamentals right now. Nobody knows what will happen next.

By Nick Cunningham of Oilprice.com

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  • R. L. Hails Sr. P. E. (ret.) on September 02 2015 said:
    Why does something that lies under the ground in Texas sharply changes price within a few days? Texas has a lot of dirt. Has dirt ever sharply changed price within a few days? Anywhere? What is the economic difference between Texas oil and Texas dirt?

    One is tightly controlled by governments and traders; the other is owned by a zillion diverse individuals who lack monopolistic power. As the secret interests compete, oil has swung from $150/br to circa $30/br. The fraction has two parts, the dollar and the barrel. The barrel never changes; the dollar changes daily.

    Lots of powerful ruthless people are interested to owning dollars; few are interested in owning dirt.

    The price of oil is rigged. The price of dirt, no so much.
  • K Yamaguchi on September 02 2015 said:
    Nick,

    Regarding your observation:
    "For the week ending August 21, the EIA says the U.S. is producing 9.33 mb/d, above what the agency now says the U.S. produced in June."

    I noticed this as well. The EIA obviously has not yet revised its weekly estimates to correspond to the new methodology and base level June production levels released on Monday.

    The EIA website says that the weekly data is derived from the monthly data, the STEO, and Rig Productivity reports. Both the STEO and Rig Productivity estimated that production would decline about 100,000 per month in July and August. In fact the weekly production estimates we get every Wednesday show a reduction of well over 200,000 barrels a day from June 26 to August 28.

    What didn't happen with this weeks report was a reset of the base to the June levels that reflect their new methodology. If it had, production for the week would have been about 8.9 million barrels, including the reduction Alaska. Even if Alaska is an anomaly, that's a pretty big reduction from prior the prior estimates we had for March and April of 9.7 million barrels a day - that we were lead to believe until two days ago.

    Maybe that would have been too big shock to report a corrected weekly number so soon after the corrected monthly numbers were released. Maybe the market is figuring it out - WTI is nearly back to $46 as I type, from low of 43.21.

    I think we had a similar situation back in May when production for one week was up 200,000 barrels, but it was a couple of weeks after they released the monthly report for March that showed a similar increase- maybe it just takes time for the various people working on these reports to get it all together). Anyway it should be coming, along with lower imports from Canada due to shutdown of some oil sand production and pipelines.

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