In the last two days, three reports have been released with current data and predictions for the oil market moving forward. Yesterday, the Oil Market Reports for July were released from both OPEC and IEA, as well as the crude oil storage report from API. This morning brought the Weekly Petroleum Status Report from EIA. This smorgasbord of data has left the price of oil reeling today, down 3.61%.
These reports come about as the oil market is in the most unpredictable position it has been in some time. Supply outages are creeping back online in Canada and Nigeria. The levels of global demand are in question. Oil price has risen to the point where U.S. oil producers are increasing rig counts, Baker Hughes has reported an increase in U.S. active rigs in five of the last six weeks. The Saudi Arabian oil minister is calling for higher prices to create a stable industry. The balancing act that is the oil supply and demand curve has been projected to come into balance as soon as 2016, or as far as 2018, with some saying we may move further from a balance before we move closer.
Whatever anyone’s crystal ball says, OPEC, EIA, and IEA all have their own take on what is occurring in the oil markets as of late.
OPEC Report
The OPEC report paints a fairly optimistic picture about future oil demand and positive growth for OPEC crude oil market share. This counters their outlook on non-OPEC supplies that are projected to decline in 2016, and continue to decline in 2017.
Production in the U.S has declined recently as more and more operators are feeling the crunch of low prices as bankruptcies begin to pile up. But there is hope on the horizon in the form of the increase in rig counts. Economics are improving and drilling rigs are increasing the number of new wells that move towards production. In Canada, oil sands production is coming back online as firefighters have declared victory on the raging fires that have halted production in Alberta.
Despite the positive signs materializing in North America, the OPEC report points to the fact that the worst may not be over, and there is still pain to be felt. Oil barrels priced in the range of $45 to $50 are a definite benefit to producers who struggled at $30 prices. However, these prices don’t equate to a life raft that can fit everyone. Producers with strong asset positions in premier basins and low cost structures can capitalize on $50 oil, but in the scope of all wells in the U.S., this is only a positive for some players.
The OPEC report could amount to a self-serving prognostication of the growth of OPEC supply, and consequent demand. The report does raise the question of whether the worst of the price roller coaster is done, since OPEC believes we should keep our hands in the air since the ride is not over yet.
IEA Oil Market Report
The IEA countered OPEC’s optimism about oil demand in the July Oil Market Report. The IEA warns that global oil demand may be ebbing while stocks remain at “elevated levels.”
“After the drama we saw at the beginning of this year when prices were sliding daily, the fact that crude oil has in the past two months moved within a range in the high $40s per barrel should be a relief for some producers. For some time now this Report has signaled a return to balance as being the big picture direction in which the market is heading,” the IEA said.
The writing may not be on the proverbial wall just yet, but the IEA feels that data is beginning to suggest that the market may not be moving increasingly closer to reaching the ever desired balance. These signs of instability could push out the timeline on the market reaching balance and lead to more short term volatility.
“In mid-summer 2016, although market balance is upon us, the existence of very high oil stocks is a threat to the recent stability of oil prices: in the first quarter of 2016 refinery runs growth (referring to the amount of oil a refinery can produce) was 60 percent higher than refined product demand growth,” the IEA said.
The supply and demand balance has been closely observed by producers worldwide and the projections of reaching a balance has driven prices higher over the last month, which have created concerns about the increase in rig count and production coming online as mentioned earlier. Should the demand wane, the supply would need to be responsive to that in order to keep prices from falling.
“Despite the regular upwards revisions to demand that we have seen in recent Reports there are signs that momentum is easing; and, although stocks are close to topping out, they are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices.”
EIA’s Take
EIA released their Weekly Petroleum Status Report this morning showing a 2.5 million barrel draw on U.S. crude inventories, once again contradicting yesterday’s report from API showing an inventory build of 2.2 million barrels. Oil futures began the day down slightly following the API report, but continued to tumble after the EIA report. The inventory draw was on target with analyst estimates, the components portion of the report showed inventory builds that likely moved oil price downward.
According to the EIA report, motor gasoline inventories increased 1.2 million barrels and finished gasoline inventories swelled. Distillate fuel inventories also increased by 4.1 million barrels last week, while propane/propylene inventories went up 2.6 million barrels. Total commercial petroleum inventories increased by 7.1 million barrels last week.
The scrutiny under which the EIA report has been analyzed shows the uncertainty under which the oil market is operating. The report of an inventory draw would normally create a situation where oil prices went up, which was the initial response as oil moved higher following the initial release. Following further examination, oil price plunged to close at $45.11 per barrel, offsetting the gains from yesterday.
