Oil prices crashed mid-week on news that U.S. crude oil inventories spiked, offering evidence that the oil market is not as tight as expected only a few days ago.
U.S. inventories jumped by 10 million barrels last week, rising to 470.6 million barrels. That is about 34 million barrels higher than at this point last year, and stocks are up about 20 million barrels in the last month alone. Rising inventories, especially consecutive increases of this magnitude, cut against the narrative that the oil market is suffering from a supply deficit.
WTI crashed on the news, falling more than $2 per barrel in midday trading on Thursday. Adding to crude's woes was news that Russia continues to produce in excess of its agreed upon cut as part of the OPEC+ deal. "When the U.S. crude-oil warehouses bulge to their highest levels since September 2017, while production continues to set new high-water marks, warning signals should be flashing red," said Stephen Innes, head of trading at SPI Asset Management, according to Bloomberg.
The oil market was roughly balanced in April, after having fallen into a supply deficit on the order of about 480,000 bpd, according to Standard Chartered. While geopolitical flashpoints dominate the headlines and spread fear of supply risk, OPEC+ may not have a ton of room to increase production without creating another supply surplus, Standard Chartered said. The only way OPEC+ can abandon its cuts without flooding the market is if it does so in order to offset outages in Iran, Venezuela or Libya, for example.
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However, while rising U.S. inventories suggest the market is well-supplied, the news on the production front is a little more mixed. The EIA just released data that pointed to a second consecutive month of oil production declines in the U.S. In February, output fell to 11.683 million barrels per day (mb/d), down by 187,000 bpd from January, and off 280,000 bpd from a peak reached in December.
The weekly estimates, which are less accurate but run through April, put U.S. production at 12.3 mb/d, a figure that may need to be revised down given where output was in February.
To be sure, the production declines can largely be chalked up to the dip in output in the Gulf of Mexico. Between January and February, offshore production fell by nearly 200,000 bpd. Still, output in Texas, by far the largest source of U.S. oil production, stood at 4.890 mb/d in February, only slightly up from November levels. In other words, Texas, home to the Permian basin, only added 34,000 bpd in the four months through February. Given the blistering growth rates in the past few years, the slowdown is notable.
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Faltering production is clearly a response to the fall in oil prices in the last three months of 2018. WTI hit $76 per barrel in early October, only to fall to $44 by late December. The contraction in output through February offers further evidence that U.S. shale is quick to respond to price movements, holding off on drilling when prices fall below breakeven points. When drilling slows, the precipitous decline rates from existing wells begin to catch up to growth, and the lack of new production coming online leads to an overall dip in output.
The oil rig count has plunged since late last year, falling from a peak of 888 in November to just 805 at the end of April. In fact, in the last week of April, the rig count plunged by 20, a substantial decrease that may subsequently prove to be an anomaly, but nonetheless is evidence of turmoil in the U.S. shale industry.
The rise in oil prices since the start of 2019 should spark another round of drilling and completions, though production gains show up on a several-month lag. However, the spike in inventories, and corresponding fall in WTI, may dash hopes of shale drillers. WTI is back down to $60 per barrel, which seems to be high enough for further growth, though time will tell.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More