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How Long Will This Oil Rally Last?

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US Drillers See Modest Rise In Oil Rigs As Prices Hold

Baker Hughes reported an increase…

Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Oil Prices Testing August Lows As Inventories Swell

As Mike D from the Beastie Boys turns fifty today, WTI is trying to fight for its right to party on in forty-dollardom. (but failing). Brent is being more successful in trying to ‘get it together’, holding somewhat steady, but the ongoing swelling-inventory, tanker traffic-jammed nature of the US market is sending prices on a ‘sure shot’ of a retest of the August lows.

There has been little in the way of economic data out overnight, leaving comments from European Central Bank President Mario Draghi to clobber the euro, propel the dollar higher. As the prospect of a US rate hike in December sits around ~70%, the WTI December contract is charging lower ahead of its contract expiry today.

The chart below shows the combined rising production from two leading sources since 2012, the US and Iraq, plotted versus OECD oil inventories. Production from the two has risen nearly 60% over the near-four year time-frame, with them currently pumping the equivalent of 4.88 billion barrels a year. In comparison, OECD inventories have only risen 10%, or 314 million barrels, as stronger demand and weaker supply elsewhere have offset the rampant additions from the two nations.

Looking ahead to next year, we are set to see aggregate production from the two countries drop, as modest rising supply from Iraq will not be enough to offset falling US production.

Related: One Underlying Catalyst Behind Syrian Conflict And Paris Attacks

Below is another nifty graphic from the folks over at Bloomberg, which shows the share of deepwater oil fields for various African governments. Six out of the ten largest global oil discoveries in 2013 were made in Africa, but the drop in oil prices over the last year and a half means two out of three investment projects on the continent are not viable at a price below $50. African production is already 19% below its peak in 2008 at 10.2 million bpd, and is set for a third consecutive drop this year.

Related: Energy Storage Tech Finally Starting To Compete With The Grid

Moving onto the good ship natty, and yesterday’s US natural gas storage report yielded a 15 Bcf injection, propelling storage to 4 Tcf for the first time ever; storage is now 11% above last year’s level and 5% above the five-year average:

Related: Poor Quarter for Canada’s Oilfield Services

As production holds up and a milder-than-normal winter appears in the tea leaves (due to the potential of the most powerful El Niño on record), the prospects look good for us exiting winter with a staunch level of storage (…although not likely as much as the 2,369 Bcf low point in March 2012).

By Matt Smith

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