Weekly Review

Oil prices climbed a bit on Monday, fell on Tuesday and Wednesday, and then surged upwards on Thursday and Friday after the Saudi energy minister said his country would be willing to discuss rebalancing the oil market. The minister said Saudi Arabia would “take any action to help” the crude market and will discuss the issue at a meeting in Septmber. Coupled with an EIA forecast that foresees a “sustained tightening” of the crude markets and a reduction in product stocks, New York futures prices now have climbed from below $40 a barrel early in the month to a close of $44.49 on Friday. The IEA says that a combination of falling production and increasing demand, which will be up by 1.4 million b/d in 2016, means that there will be no oversupply in the second half of this year. The Agency believes that refinery processing of crude is now down about 500,000 b/d year over year and projects that production in North and South America alone will be down by 700,000 b/d in the third quarter.

Oil prices fell steadily during July as the realities of oversupply trumped traders’ hopes that there would be balanced markets and higher prices later this year. July opened with London trading just below $51 a barrel and New York around $49.50. By month’s end, London was down to $42.71 and New York to $40.74. The month’s trading was dominated by reports of increasing oil product inventories and higher OPEC production. The decline of nearly $10 a barrel naturally has had repercussions across the oil industry. For most of July, the US rig count was growing as drillers anticipated that crude prices would soon be at a level where more wells would be profitable. By month’s end, however, these hopes had been dashed, and the US oil rig count had nearly stopped growing.

Concerns are rising that the predictions of the oil markets coming back into balance later this year are wrong and that lower oil prices are ahead. Oil production is not falling as fast as predicted. Some outages are coming to a close and the growing glut of oil products could be as bad as last year’s crude glut. Many analysts now are talking about prices falling below $40 in the next few months and a few are even talking about a return to the $30 level. Although US crude stocks have been falling of late, the growth in the inventories of refined products continues to grow. Europe is running out of storage space for refined products which would force a cut in refining and result in lower demand for crude. Increased refining to support the summer driving season in the US has only another few weeks to run before the increased demand for gasoline comes to an end. The US oil rig count was up for the 6th time in 7 weeks and North Dakota reported that its oil production increased slightly in May.

Futures fell about $4 a barrel during the holiday-shortened US trading week closing at $45.41 in New York and $46.44 in London. Prices edged down early in the week, recovered a bit on Wednesday, and the plunged after the EIA reported that the US crude inventory had dropped by only 2.2 million barrels as opposed to the 6.7-million-barrel drop that the API came up with after their weekly survey. The weekly decline for Brent was the largest since January.