Opinion

Oil Prices Plunge: Over-Reaction or Turning Point?


Oil prices plunged yesterday. Is this an over-reaction or a turning point?

WTI futures fell $2.86 from $53.14 to $50.28 per barrel, and Brent futures dropped $3.81 from $55.92 to $52.11 per barrel. WTI is trading below $49 and Brent, below $52 per barrel at this writing.

The apparent cause was a larger-than-expected 8.2 million barrel (mmb) addition to U.S. crude oil inventories.

Over-Reaction

That was an over-reaction based on history since the OPEC production cut was finalized in late November 2016. WTI has fallen below the $50 to $55 per barrel range in which oil futures have traded for the last 3 months (Figure 1).

Figure 1. Oil prices have not exceeded $55 per barrel since early 2015. Source: EIA, CBOE and Labyrinth Consulting Services, Inc.

An 8.2  mmb addition to crude oil storage is actually fairly normal during the annual re-stocking season that we are in now (Figure 2). Inventories increased more–10.4 mmb–during this week in 2016 and the 5-year average for this date is 5.3 mmb.

An 8.2 million barrel addition is fairly normal for re-stocking season. Source: EIA and Labyrinth Consulting Services, Inc.

The fact that inventories have been in record territory since the beginning of 2015 has not kept oil futures from going through several rallies or from trading near $55 per barrel since November. The 13.8 mmb addition to storage a month ago was larger than yesterday's amount yet prices barely responded.

Comparative inventory–the crucial price indicator-only moved up 2.4 mmb (Figure 3). That is because we are in the re-stocking season and compared with previous years, this addition to storage is not that big. Other key measures of gasoline and diesel volumes fell by more than 1 mmb each.

Figure 3. Comparative crude oil plus refined products inventory increased only +2.4 mmb. Source: EIA and Labyrinth Consulting Services, Inc.

And there was some very good news this week that the markets ignored. EIA's Short-Term Energy Outlook (STEO) showed that the global market balance (production minus consumption) moved to a deficit last month. The world consumed almost a million barrels more than it produced in February (Figure 4).

Figure 4. The world liquids market balance (production minus consumption) was -1 mmb/d in February 2017. Source: EIA March 2017 STEO and Labyrinth Consulting Services, Inc.

This is a one-month data point and should not be seen as a trend. Still, it is a positive sign that seems to have been overwhelmed by an otherwise normal addition to U.S. storage.

The March STEO also had good news about world demand. The average liquids consumption growth for 2016 was 1.5 mmb/d and 1.6 mmb/d for the first two months of 2017 (Figure 5).

Figure 5. 2016 global liquids consumption growth: +1.5 mmb/d, early 2017: +1.6 mmb/d. Source: EIA March 2015 STEO and Labyrinth Consulting Services, Inc.

In mid-2016, there were indications that consumption was only growing at only about 1.2 mmb/d but particularly strong year-over-year performance from August through January have brightened that outlook.

Turning Point

Although yesterday's price plunge may have been an over-reaction, it may also represent a turning point for prices to adjust downward.

I have written for months that global oil inventories must fall before prices can make a sustainable recovery yet they remain near record levels. OECD inventories fell 15 mmb in February but are nearly 550 million barrels above December 2013 levels (Figure 6).

Figure 6. OECD incremental liquids inventories are near record high levels. Source: EIA and Labyrinth Consulting Services, Inc.

Brent was probably $10 over-valued at $55 and WTI was at least $6 over-valued at $54 per barrel as Figure 1 shows.

The other negative weighing on oil prices is the increase in U.S. crude oil production. Output has increased 420,000 b/d since September and EIA forecasts that it will exceed 10 mmb/d by December 2018 (Figure 7). That is higher than 1970 peak production and 1.1 mmb/d more than current levels. In short, this would more than cancel the U.S. decline since oil prices collapsed in late 2014.

Figure 7. EIA U.S. crude oil forecast is 10.1 mmb/d and $59 WTI by December 2018. Source: EIA March 2017 STEO and Labyrinth Consulting Services, Inc.

There has been a change in the term structure of futures contracts since the OPEC production cut was finalized. In the last week, the maximum price for the next year has fallen $2.81 to $51.36 per barrel and prices do not reach $52 until mid-2021 (Figure 8).

Figure 8. The term structure of WTI futures contracts has changed. The January 2018 price has fallen $2.81 per barrel in the last week. Source: CME and Labyrinth Consulting Services, Inc.

Although the forward curve of futures contracts is hardly a predictor of oil prices, it appears that a major downward shift in oil prices is occurring.



New service from OilVoice
Trip Shepherd is for companies who need to track their staff in areas of risk.
It's free to use, so we invite you to try it.

Visit source site

artberman.com/oil-prices-plunge-over-reaction-or-t...

Art Bermanoil price

More items from artberman


Alternative Facts About OPEC & U.S. Shale From The Wall Street Journal

Posted in The Petroleum Truth Report on December 19, 2018 The Wall Street Journal's recent editorial “ How America Broke OPEC ” shows that even high-quality journalism is susceptible to the contagion of alternative facts. It is a propaganda piece about how the underdog U.S. oil industry miracul ...

Art Berman - The Petroleum Truth Report


Posted 1 year agoOpinion > OPECUnited StatesUSA +3

Oil Markets Recover From Panic Attack but Prices Will Go Lower

Crude markets had a panic attack in August and September that sent prices soaring. Sanity is now returning. Prices have fallen but are likely to move even lower over the next few months. The panic attack was caused largely by Trump's August 7 announcement that sanctions would be re-imposed on Iran ...

Art Berman - The Petroleum Truth Report


Posted 1 year agoOpinion > Oiloil priceCrude +5

Natural Gas Risky Business: What, Me Worry?

Natural gas storage is at record low levels but prices are falling going into winter heating season. Markets seem to be betting that wellhead supply will be sufficient to cover demand this winter. That may be but at what gas prices? This is a game of natural gas risky business. Natural gas 6- ...

Art Berman - The Petroleum Truth Report


Posted 1 year agoOpinion > natural gasStorageArt Berman +3

Art Berman: Don't Believe The Hype - Oil Prices Aren't Going Back To $100

The breakout in Brent crude prices above $80 this week has prompted analysts at the sell side banks to start talking about a return to $100 a barrel oil . Even President Trump has gotten involved, demanding that OPEC ramp up production to send oil prices lower before they start to weigh on US co ...

Art Berman - The Petroleum Truth Report


Posted 1 year agoOpinion > Art BermanOil PrucePresident Trump +4

Markets Have De-Valued Oil Prices: How Long Will It Last?

Comparative inventory: The most important approach to oil & gas price formation Comparative Inventory (C.I.) is the difference between current stock levels of crude oil & select refined products, and their 5-year average. C.I. has accurately predicted most of the changes in oil pric ...

Art Berman - The Petroleum Truth Report


Posted 1 year agoOpinion > Art BermanOil pricesOil +7
All posts from artberman