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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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The New Bear Market In Oil

WTI dipped below $60 per barrel in early trading on Friday, the lowest price level in nearly a year. With prices down more than 20 percent from the October peak, WTI is now officially in a bear market.

Many of the factors that conspired to push oil prices up in recent months have all seemed to reverse course at exactly the same time.

First, U.S. shale production is skyrocketing. The EIA reported an unbelievable increase of 400,000 bpd in U.S. oil production in the first week of November, pushing output up to 11.6 million barrels per day (mb/d). The agency rounds off weekly estimates to the nearest hundred thousand barrels, somewhat obscuring the trajectory of growth, but the huge increase is notable by any standard.

Also, the weekly estimates are not as accurate as the monthly figures, which are published on a roughly 2-month lag. As such, they should be taken with a grain of salt. However, the massive increase comes just days after the EIA reported a huge increase in production in the monthly data – at 11.346 mb/d in August, the U.S. oil industry has clearly been producing a lot more than previously thought. That lends some weight to the weekly figures.

Another previously-bullish factor was Iran. With Iran’s oil exports spiraling downwards at the end of the summer and into September, the oil market grew very concerned about adequate global supply and the rapidly dwindling volume of spare capacity. U.S. waivers on countries importing Iranian oil removed that threat. Washington still wants to tighten the screws – and in fact, the sudden bearishness in the market gives the Trump administration more leeway to do just that – but in the near-term, Iran will continue to export.

A third factor is OPEC+ production. Saudi Arabia, the UAE, Iraq, Russia and Libya have all increased production in recent months, offsetting the losses from Iran. Now, the group has a different problem on its hands. A technical committee to the OPEC+ coalition is set to meet this weekend where it will take stock of the oil market. They will also consider options going forward for managing the market, including the potential for a production cut in 2019 to avoid another market downturn. The 180-degree turn – from adding supply just a few months ago to now considering a cut – is a remarkable indicator that demonstrates how quickly the sentiment has turned.

Related: U.S. Oil Production Is Set To Soar Past 12 Million Bpd

Finally, the global economy continues to throw up red flags. Demand has already been revised down by most energy forecasters, and is expected to continue to slow next year. A worse economic downturn is not out of the cards, which would result in much sharper revisions. “As OPEC exports continue to rise, inventories continue to build, which is putting downward pressure on oil prices,” Bernstein Energy said. “A slowdown in the global economy remains the key downside risk to oil.”

On Friday, WTI fell below $60 per barrel for the first time in this calendar year. Brent fell below $70.  “There is no slowing down the bear train,” Stephen Brennock, analyst at London brokerage PVM Oil, told Reuters. “Instead, the energy complex has extended a rout driven by swelling global supplies and a softening demand outlook.”

Related: Is Shale The Future For Big Oil?

To top it off, Iraq and Kurdistan are nearing a deal that could reopen shuttered oil production from disputed Kirkuk oil fields, according to the FT. After Iraq reclaimed territory from the Kurds in and around Kirkuk a year ago, operations at the fields were interrupted. The U.S. government has been pressing the two sides to resolve their differences. In fact, Washington has been reportedly pushing for more supply in several key areas in an effort to offset the outages coming from Iran. U.S. diplomats have also pressed Saudi Arabia and Kuwait to resolve their differences over the Neutral Zone oil fields, thus far with little success.

If Iraq and the Kurds reach a deal, it could add another 400,000 bpd of supply to the global oil market.

That would surely put a lot more pressure on OPEC+ to take action. “Market participants are clearly testing the pain threshold of oil producers in a bid to force them to reduce supply,” Commerzbank said in a note. With supplies rising and prices falling, oil traders are surely starting to factor in rising odds of an OPEC+ production cut when the group meets in a few weeks in Vienna. “If they fail to signal any intention to reverse the latest increase in production, oil prices threaten to slide further.”

By Nick Cunningham of Oilprice.com

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  • Thomas Pholary on November 11 2018 said:
    I agree, the stuff is worthless. Nobody wants it or needs it. Shale produces enough oil to satisfy all markets and its plentiful and cost next to nothing to bring it out of the ground.
  • Mitch on November 12 2018 said:
    If the Saudi's cut 500k bpd, the price per barrel only needs to increase by $3.50 to have the same revenue... but also removing more expensive pumping, or heavy pumping that could be detrimental to reservoirs over the long term.

    Certainly if they do nothing, prices will keep cratering for the reasons in this article. That alone should be reason to ramp up production cut rhetoric
  • Mamdouh G Salameh on November 12 2018 said:
    Reading your articles and those who contribute to the oilprice.com, one can’t help getting the impression that the views expressed on rising US shale oil production and the alleged decline in Iran’s oil exports as a result of US sanctions are not only blatantly biased in favour of US policies but are also plain untruths.

    I told you previously that when you make a claim, you have to support it with facts otherwise it will be depicted as fake by your readers. Your claim that Iran’s oil exports are spiralling downwards as a result of US sanctions is a plain lie. The onus is on you to provide us with reliable figures about the loss and the countries that actually reduced their imports with the exception of South Korea and Japan. This will be more convincing to your readers than quoting claims from US officials or from the EIA and IEA.

    Moreover, issuing US sanction waivers to eight countries who didn’t need them in the first pace and who wouldn’t have stopped buying Iranian crude waivers or no waivers wouldn’t have offset a real tightness in the global oil market. Only two countries namely Japan and South Korea which account for 5% of Iranian oil exports (110,000 barrels a day) would have needed sanction waivers to continue importing Iranian crude. Such a volume would have had no impact whatsoever on the global oil supplies.

    Claims by the EIA that US oil output hit 11.6 mbd in November are normally discounted by the global oil market along with utterances by the IEA. The EIA’s weekly figures are normally 700,000 b/d to 1 mbd higher than the monthly figures. So production figures could have been estimated at 10.6 -10.9 mbd if any. The EIA has always worked on the premise that by the time it published its monthly figures, the global oil market would have forgotten about its exaggerated claims in the weekly figures.

    Furthermore, US domestic consumption is just over 20 mbd and its imports amount to 10 mbd meaning that US shale oil production could not be higher than 10 mbd.

    Saudi Arabia and Russia made a grave mistake by adding 400,000 barrels a day (b/d) and 250,000 b/d respectively to the market four weeks ago. In so doing they enhanced the small pocket of glut still in the market and exerted a downwards pressure on oil prices. Saudi Arabia’s oil minister Khalid al-Falih announced today that Saudi Arabia will cut its production in December by 500,000 b/d but he shouldn’t expect any OPEC members to cut production since unlike Saudi Arabia they never raised oil production after the OPEC meeting in June this year.

    Still, I am convinced that oil prices will soon recoup their losses and head towards $80-$85 a barrel before the end of the year buoyed by robust fundamentals of the global oi market and also surging Chinese oil imports.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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