Yup, you heard it here first (or second, maybe even third), last week was the week that it all happened, the week that we can finally call the oil price crisis officially over.
Okay, maybe not completely over, or even close to almost over, but is sure was nice for a while to taste the sweet nectar of oil prices over $50, no matter how fleeting that might be.
So what happened? Well, a few things.
Global storage and inventory finally seems to have turned the corner. Although as mentioned before the data is hopelessly lagged, completely untransparent and unreliable at the best of times, the anecdotal evidence is piling up. From completely unsubstantiated stories of critical supply hubs in Africa being drained of oil to another article exposing China as an oil hoarder, the trend is unmistakable – inventories are coming down. Now, if only we could have some proof…
Aside from Libya and Nigeria, the OPEC/NOPEC production restraint alliance has held up surprisingly well. With compliance high and the market seemingly turning the corner, it was interesting to hear the speculation that extending the cuts further into 2018 from the current March end date was on the table. While not explicitly discussed at this Friday’s meeting to assess the effect of the production-cap agreement and progress toward a balance between supply and demand, it will surely be on the agenda for the November semi-annual fooferah and bait and switch session.
Rhetoric and Global Instability
The world is a funny place. Just when you think we have reached some measure of peace and stability, someone throws a wrench into things. Now, aside from the usual nonsense in the Middle East, we have specific hot spots which should see the risk premium in the price of oil rise over the next few months. These include:
• The ongoing conflict in Yemen, which is increasingly expensive and distracting for Saudi Arabia and threatens to drag in the United States
• The Monday referendum on Kurdish independence in Iraq and what it means for oil production in the important Kirkuk region. Right now, it’s up in the air.
• The on-again, off-again sabre rattling by the Americans towards Iran and threats to cancel the nuclear agreement and reinstate sanctions
• The very frightening escalation of tensions on the Korean Peninsula between North Korea and pretty much the rest of the world but particularly South Korea, Japan and the United States. While presumably cooler heads on either side should and will prevail, the war of words between “Rocket Man” and “the Dotard” risks allowing events to spiral out of control.
• And who can forget the ongoing covfefe crisis in Nambia.
U.S. field activity, draw-downs of fuel supplies with the refinery shutdowns in the United States.
As noted previously, the rig count seems to have plateaued in the U.S., held back by range-bound oil prices, rising field costs and skittish capital markets. This makes the predicted tsunami of tight oil less likely to overwhelm the market (at least until oil hits $55 to $60, then watch out!). That said, the oil and gas sector has a tendency to over-invest at absolutely the worst time so keep an eye out.
Another significant influential factor is the knock-on effects of the shutdown of refineries due to Hurricane Harvey and the after effects of both Harvey and Irma. In a nutshell, huge draw-downs in fuel and distillates (think cars, diesel for heavy machinery) are not being supported fully by refinery runs which will serve to draw down the excess inventory and are quite bullish for prices.
The impact of lower investment
The IEA published a chart showing the upstream oi and gas investment was down 44 percent in 2016 from 2014. While a modest uptick is expected in 2017 (mostly U.S. tight oil and Canada), the spillover effect of this drawback in investment is in most analyst’s views likely to be tight supply starting perhaps as early as late 2018, especially if the OPEC cuts hold and the US has really plateaued.
But the big catalyst?
Let’s face it, most of the above are supply side and are all at the margin. The biggest factor in any strength of prices or longer-term reduction in inventory has to be demand driven. Well I guess it’s fair to say that the consumer has finally delivered on cue. According to the IEA, demand growth is a robust 1.6 million barrels a day so far this year, far ahead of earlier forecasts and supporting some of the highest levels of global GDP growth in recent memory, proving yet again that the world craves nothing more than sweet, cheap oil. Can we go to $60 and not knock the recovery on its ass? I believe so.
The Jeff Rubin Effect
OK, not a big factor, but I read an article this week that reminded me of it. Canada’s very own wavy haired and silver-tongued prognosticator of all things extreme has emerged from hiding and pronounced that new pipelines are unnecessary because oil is dead and oilsands are uneconomic, too expensive and that we should all move on with our lives. This is the same Mr. Rubin who predicted $200 oil back in 2006 right before oil plunged from $147 to $40 a barrel and subsequently predicted the demise of the industry right before the last run-up in prices. Always the contrarian, always provocative and entertaining but often negatively correlated with the market – the Jeff Rubin effect is a real thing. If he’s telling me to sell, I’m thinking it may be time to buy. Related: OPEC’s Premature Victory Lap
So are the good times here to stay?
Good times is such a relative term right? In 2014 $50 oil was the nightmare scenario. Here at the end of the third quarter of 2017, a full three years after prices started to crater, it’s time to break out the bubbly. Realistically, I don’t think we are out of the woods by any stretch and we are certainly not in good times quite yet. Where we are is better times. Better than last week. Better than a few weeks ago. Absolutely better than February 2016 that’s for sure. I don’t think there is any sense in getting too carried away on the back of a one-week rally that puts us barely over $50 a barrel, but it sure feels better this week than last.
Am I changing my forecast yet again? Nope. $56 is where I revised myself to. Seems a pretty good call at this point.
By Stuart Parnell via Stormont Energy
More Top Reads From Oilprice.com:
- Was Goldman Sachs Wrong About Oil Demand?
- Baghdad Asks World To Stop Buying Kurdish Oil
- Erdogan Threatens To Cut Off Kurdish Oil Exports