Author: Tom Whipple

Last week saw volatile oil prices and unexpected developments that could have major consequences for the oil industry. The week started on a bearish tone with prices pulling back from weeks of steady increases. As the week wore on several unanticipated oil production outages occurred sending prices higher. At week’s end, however, both US and Brent crude were lower, the first weekly loss after four straight weeks of gains with New York futures at $44.66 a barrel and London at $43.37.

Analysts are starting to wonder as whether 2016 could turn out to be similar to 2015 when oil prices rose sharply in the first five months of the year on hopes that the oil surplus would soon be over, and then collapsed in May when it became apparent that there was going to be more oil around than necessary. Last week the price surge which began in February continued throughThursday and then slowed on Friday leaving London futures at $48.13 at the close and New York at $45.92. The impetus for the surge is that that hedge funds and other speculators are convinced that the two-year price slump is over and that higher prices are ahead. This forecast is supported by the steady decline in the US rig count, which continued last week; a continuing drop in US crude production which the EIA projects will continue into next year; a weaker dollar due to the Federal Reserve’s failure to increase interest rates; increased consumption of gasoline in the US due to low prices; market technical analysis showing prices breaking various “ceilings;” and news of a string of production outages across the globe due to insurgencies and unsettled economic conditions.

Oil prices climbed to recent highs early last week on hopes that the Doha meeting would eventually lead to some sort of production cut, a weaker dollar, and scattered production problems. Later in the week prices fell as the US crude glut continued to grow and expectations that something meaningful would come from the Doha meeting subsided. At week’s end, New York oil was at $40.36 and London at $43.10 up 2.8 percent for the week.

Oil prices surged 8 percent last Friday and are now back at levels seen at the top of the last price surge in mid-March. This time strengthening the US and German economies, a falling dollar, and the OPEC price freeze meeting on April 17th was seen as the trigger behind the rally. Friday’s rally was the 12th time in the last two months that daily prices have surged by 5 percent or more showing that there is a lot of money eager to participate in big price rise that will come someday. However, this rally was mostly based on hopes that things are going to get better rather than any specific news, other than the recent increases in US gasoline consumption which are likely to short-lived as retail prices move higher.

The six-week long surge in oil prices which pushed the price of crude up by roughly 50 percent seems to be coming to an end with prices down 6 percent last week. Looming behind the price increase was the notion that the world’s major crude exporters would to get together and sign an agreement to freeze production at current levels. Supporting the price jump was an increase in US gasoline consumption as prices fell to levels not seen in decades and the never ending hope that the US economy was about to get better. Much of the surge was caused by the liquidation of the unprecedented short futures positions that hedge funds and other speculators had built up during the nearly two-year slide of oil prices. When oil fell below $30 a barrel, many speculators figured that the long price slide was over and that oil was unlikely to go much lower. The resulting liquidation of positions which pushed up prices was the largest on record.

Oil prices finished a holiday-shortened trading week on Thursday relatively unchanged. Oil had been a bit higher on Monday and Tuesday but then underwent a $2 a barrel decline on Wednesday after the weekly stocks report showed a 9.4-million-barrel increase in the US crude inventory. Prices recovered by a dollar or so on Thursday to close at $39 in New York and $40 in London, partly in response to a 15-unit drop in the US oil rig count. The 50 percent price increase since January still seems to be based mostly on unrealistic expectations that the large oil exporters will cut production enough to bring supply and demand back into balance. So far, however, crude stocks have continued to rise, and production cuts have been minimal.

The price rally that has been on-going since mid-February continued last week with US futures closing Friday at $39.44 a barrel, up 2.4 percent for the week, and London futures closing at $41.20 up 2 percent. Last week the move came from a combination of what one analyst termed a “brilliant communications strategy” and other developments that normally lead to higher prices. The “brilliant communications strategy,” of course, is the meeting in April during which those countries that either cannot or do not want to increase oil production are supposed to agree not to increase their production. During the week, Moscow even hinted that Iran might join the group after it increases its oil output to 4 million b/d, a goal that might take many months or even years to reach. The producers now are scheduled to meet on 17 April in Qatar; the meeting is being heralded as the first agreement to limit global oil production in 15 years even though it is unlikely to have any real impact on oil production.

Oil prices continued to move higher last week closing at $38.50 in New York and $40.39 in London, up 7.2 and 4.3 percent respectively for the week. The two-month surge which has taken oil prices up some 45 percent started with reports in January that Russia and the Saudis were trying to bring major oil producers together to agree on a production freeze. This idea is now fading as Iran adamantly refuses to freeze production and no other exporters seem willing to cede current customers to Tehran. The impetus for the price increase now is focusing on forecasts that low prices could lead to a decline of some 750,000 b/d in non-OPEC oil production this year – mostly in the US. Some of this could, of course, be offset by increased Iranian exports. Tehran had hoped to increase production and exports by 1 million b/d this year but is having difficulty finding customers and increasing production. A weaker US dollar also contributed to the oil price increase last week.

Oil prices rose for the third consecutive week with New York futures closing at $35.92 a barrel and London at $38.72. Prices in London are now up 3.9 percent for the year. Behind the price rise is a continuing drop in the number of drilling rigs operating in the US and the announcement by several major shale oil producers that they plan to suspend new drilling until prices recover. Exactly where profitability is these days is in dispute with some drillers contending they can make money from shale oil if prices rise into the mid- $40s as compared to $60-70 two years ago. Some of these claims are for the benefit of the banks who have become very wary of the oil industry in recent months. The downside, of course, is that if shale oil producers start increasing production if prices get into the mid-$40s, they could easily drive them back down again with unsaleable production.

Oil had a good week for a change with New York futures rising 3.2 percent to close at $32.78 and London climbing 6.3 percent to close at $35.10. This time, there was more than just wishful thinking behind the price increase as pipeline outages shut in 600,000 b/d in Kurdistan and 250,000 b/d in Nigeria to cut global exports by 850,000 b/d. In both cases, it is unclear as to just when the pipelines will reopen. In Nigeria, the outage was due to an underwater leak while the situation in Kurdistan likely is related to one of many wars taking place in the region.

The oil markets climbed through Thursday last week in hopes that the Saudi-Russian “pact” to freeze oil output would lead to lower production and higher prices. After it became clear on Thursday that countries adhering to the pact were already pumping oil as fast as they could and had little to no interest in lowering production unless forced to by geology, the markets began to fall. In New York, where futures had traded close to $26 a barrel the week before last, prices peaked at nearly $32 before falling back to close Friday at $29.64. London followed a similar pattern, climbing from $30 to nearly $36 before falling away to close at $32.91. This was the third mini price spike we have had in the past year based on stories that an agreement was in the offing that might cut production.

Oil prices plunged for four days last week, settling at a recent low of $26.21 in New York, a drop of nearly 30 percent since the start of the year, and $30.06 in London a 20 percent drop this year. The inevitable rebound came on Friday with a vigorous jump for the day of $3.23 or 12.3 percent in New York to close at $29.44, and $3.30 or 11 percent to $33.36 in London. This time the rebound was started by rumors out of the UAE that OPEC, while not considering a production cut, might be willing to consider halting further increases in production. This rumor was seen by traders as a willingness on the part of OPEC to take charge of the oil supply situation for the first time since the crisis began. Another factor contributing to the decline was the long weekend in the US and the unwillingness of traders to be caught in short positions with prices so low. As one analyst said, “every time someone in OPEC comes out and says we are willing to cooperate, there is always a knee-jerk reaction on the part of oil traders.” “No one wants to be caught selling futures at the bottom of the move.”

It was a volatile week, with prices falling on Monday and Tuesday due to the oversupply situation and traders deciding that a grand agreement between Russia and OPEC to cut oil production was unlikely. However, prices climbed on Wednesday as talk of the Russia/OPEC deal revived, the US dollar underwent a sudden price drop, and a hedge fund that that held $600 million in short oil futures positions was liquidated. On Thursday and Friday, the markets were back to believing that the Saudis were not going to cut production as Riyadh lowered their prices for oil being sold to Europe and Asia as part of the new competition with Iran. A big jump in US crude and gasoline inventories announced on Wednesday helped with the downward pressure. At week’s end, New York futures closed at $30.89, down 8.1 percent for the week and London closed at $34.06, down 5.4 percent for the week.