Oil continues climb
Oil prices continued to climb today, following a trend from late last week. West Texas Intermediate for October 2015 was trading at $47.50 per barrel today, up about $10 from last Monday’s lows. Last week, better than expected economic data, improvements in the Chinese economy and an unexpected draw on crude oil led to both WTI and Brent crude prices increasing more than 10% in just one day.
Prices continued to recover today due to a mild corrective rally on a severe oversold decline, fears that the longer end of the strip might be incorrect and badly exposed to being excessively short, a reaction to increasing military action by Saudi Arabia in Yemen and expanding conflict in the region, a moderate decline in the U.S. dollar, and expectations that U.S. and world production may indeed decline, according to a recent note from Global Hunter Securities.
Adding to the growing momentum behind the increase in oil prices was a release from OPEC that suggest the group is increasingly interested in finding a way to improve prices.
In the OPEC Bulletin for July 2015, the organization wrote, “Apart from the obvious loss of much-needed revenue required for Member Countries’ socio-economic development, there are growing fears that, under the current low-price scenario, investment in future capacity additions will continue to be shelved or cancelled altogether. With the long lead times associated with bringing new oil to market, the industry cannot afford a lapse in spending, particularly in view of the long-term expectations for oil demand, which point strongly to a considerable rise in world oil consumption over the next two decades at least.”
According to the GHS note, OPEC countries, especially those in the Persian Gulf, have left themselves badly exposed to lower oil prices because their economies depend so heavily on oil revenue to fund budgets. “Pressure is increasing within OPEC to increase crude oil prices as quickly as possible,” said the GHS note. “Otherwise some members will face levels of internal, structural sovereign stress at a very fundamental level.”
Another article in this month’s OPEC Bulletin, titled “Cooperation holds the key to oil’s future,” said the organization “stands ready to talk to all other producers, but this has to be a level playing field. OPEC will protect its own interests.”
During an interview with Oil & Gas 360®, Tom Petrie, chairman of Petrie Partners, said OPEC would likely only continue to hold production high for the next 6-12 months, but that the Saudi-led decision to continue pumping at full speed might be a form of market therapy. With much of OPEC feeling the pressure of lower prices, Saudi Arabia may be able to convince other member to shoulder production cuts as well.