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Oil Prices Nosedive On Bearish IEA Report

Oil prices are cratering after…

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The IEA Is Grossly Overestimating Shale Growth

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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Is There Still Hope For Higher Oil Prices?

Oil

Oil prices have cratered in recent weeks, dipping to their lowest levels in more than seven months and any sense of optimism has almost entirely disappeared. All signs point to a period of “lower for longer” for oil prices, a refrain that is all too familiar to those in the industry.

WTI dipped below $44 per barrel on Tuesday, and the bearish indicators are starting to pile up.

Libya’s production just topped 900,000 bpd, a new multi-year high that is up sharply even from just a few weeks ago. Libyan officials are hoping that they will hit many more milestones in the coming months. Next stop is 1 million barrels per day (mb/d), which Libya hopes to breach by the end of July.

U.S. shale is arguably the biggest reason why prices are floundering again. The rig count has increased for 22 consecutive weeks, rising to 747 as of mid-June, up more than 100 percent from a year ago. Production continues to rise, with output expected to jump by 780,000 bpd this year, according to the IEA. Ultimately, the shale rebound appears to have killed off yet another oil price rally, the latest in a series of still-born price rebounds since the initial meltdown in 2014.

Hedge funds and other money managers slashed their bullish bets on crude oil futures in the latest data release. Sentiment is profoundly pessimistic at this point, and because the IEA, OPEC and EIA recently published very downbeat assessments about the pace of rebalancing, a grim mood will be sticking around for a little while. The next reports from those energy watchers won’t come out for almost another month. Related: Iran: OPEC Considers Cutting Deeper As U.S. Shale Beats Forecasts

In the meantime, the weekly EIA data on production and inventories will have outsized importance, mainly because it is one of the few concrete indicators that comes out on a routine basis. Analysts are now worried that a string of bearish data could push prices down even further. "We cannot afford to have another build in crude or gasoline," Bob Yawger, director of futures at Mizuho Securities USA Inc., told Bloomberg before the latest data release. "The market’s just dying for a reason to buy this thing, but you can’t really do that before" the EIA publishes its next batch of weekly data on Wednesday. Gasoline demand also looks weak, just as the summer driving season in the U.S. gets underway, a period of time that typically sees demand rise.

The market got a bit of a reprieve on Wednesday when the EIA reported some decent figures – a drawdown in crude oil inventories by 2.5 million barrels. Also, imports were flat and gasoline stocks fell slightly.

Still, the figures aren’t enough to put the market at ease.

Amid all this doom and gloom, Saudi Arabia’s energy minister Khalid al-Falih tried to put on a brave face, arguing on Monday that the market will “rebalance in the fourth quarter of this year taking into account an increase in shale oil production.” He waved away the recent price drop, dismissing the importance of such short-term movements in the market.

But with WTI dropping below $45 per barrel, most sober oil market analysts are not nearly as sanguine. OPEC’s objective of bringing global crude oil inventories back into five-year average levels is looking increasingly difficult to achieve, at least in the timeframe laid out by the cartel. “There seems to be very low conviction in the market that there really will be any inventory drawdown in the second half of the year,” said Bjarne Schieldrop, chief commodities analyst at SEB AB.

This is like a falling knife right now, I genuinely haven't seen sentiment this bad ever,” Amrita Sen, the co-founder and chief oil analyst at Energy Aspects, told CNBC on Wednesday. “We have had clients emailing saying they have been trading this for 20 or 30 years and they have never seen something like this.”

Related: Shale Efficiency Has Peaked… For Now

One pivotal factor that could really cause prices to plunge is if compliance with the agreed upon cuts starts to fray. There are several reasons why some participants might start to abandon their pledges. Russia, for example, tends to produce more oil in summer months, a fact that might tempt them to boost output. Iraq is also eyeing higher production capacity this year. In addition, weak prices could start to undermine the group’s resolve. "Lack of major upside price response to the OPEC output cuts upping the odds of reduced compliance to the agreement in our opinion," Jim Ritterbusch, president of energy advisory firm Ritterbusch & Associates, wrote in a research note.

Moreover, simmering conflict in the Middle East could continue to grow, threatening to derail cooperation between OPEC members. The conflict between Saudi Arabia and its Gulf allies on the one hand, and Qatar and Iran on the other, could deteriorate. Although that could spark some price gains for crude oil if supplies are affected, it could also undermine the OPEC deal.

One unknown factor that could prevent oil prices from falling further is the possibility that prices floundering in the mid-$40s actually puts a lid on shale production. If U.S. shale underperforms over the next year, the OPEC deal could succeed in balancing the market. But if U.S. shale continues to rise, and OPEC fails to extend its deal beyond the first quarter of 2018, oil could fall to $30 per barrel, according to Fereidun Fesharaki, chairman of consultants FGE.

By Nick Cunningham of Oilprice.com

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  • Tyler on June 21 2017 said:
    You could have just said "no" :)

    One interesting note: 6/20/16: Oil @ $48. EIA rpt showing 530,000,000 BB inventory. 6/21/17: Oil @ $43. EIA rpt showing 509,000,000 BB inventory.

    Dont really understand it...
  • Will on June 22 2017 said:
    Maybe the short term price does need to fall to $30, if anything maybe the US will learn to rein it's mad drilling activities. I have seen comments from us oil workers spouting political slogans like 'Drill baby drill'. Well I hope they saved some money because they will be on welfare in the next few months.

    However they might get lucky. I think analysts are underestimating regional tensions in the ME. The situation is already volatile. All it takes is one incident in the Straits of Hormuz between KSA and Iran, which would send oil exponential. Which would suit Saudi.....and the US just fine.
  • Erin on June 22 2017 said:
    And why do we want higher prices, Nick?Is it so the fabulously wealthy can become wealthier? They are still making a nice profit, but I guess we want to go back to $4 and $5 gas? Who cares about the consumer anyway.
  • Wilson on June 27 2017 said:
    No we want higher prices so that the hundreds of thousands of people who are out of work in Oil & Gas related industries around the world can return to work. All of the commentary always relates to the US, what about the European workers in Oil & Gas predominantly working offshore which needs oil prices above $50 to return to some kind of normality. Companies are making profit at the current levels but in Europe the workforce is really struggling.
  • w bennett on July 17 2017 said:
    Mate i have just read that reduculous article about the collapse of the Saudi oil production, to come up with that story what ever they are paying is not enough to try an convince people this is a genuine truthful article, as trumpy would say FAKE NEWS

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