The crude oil market had another week of slump and dump as the main event seemed to be the International Energy Agency (IEA) report about increasing shale output and slack demand for gasoline in the United States that suggests the supply glut may last longer previously thought. For natural gas though we may have hit a bottom after a bullish storage report from the Energy Information Administration (EIA) and forecasts for hot weather and potential tropical storm activity brewing in the Atlantic Ocean.
Crude oil could not catch a bid as the market is believing more and more that OPEC production cuts may not be enough. Since OPEC announced the expected extension of cuts, the market has gone straight down. This week the IEA piled on by saying that the global oil glut will not subside in 2017 and that OPEC efforts to get supply under control is taking longer than expected. This while we see increased production by the U.S. shale producers as well as by OPEC countries that are not bound by the agreement such as Libya, which announced that its production will reach 900,000 barrels a day within days and Nigeria. To add even more bearish news, there are reports now that even the Canadian oil sand producers that were so beaten down may make a comeback this year giving the U.S. a run for its money on supply growth.
While that is all well and good the reality is that if oil prices fall much further, it is not going to happen. Despite the amazing advances made by U.S. shale producers and apparently Canadian oil sands producers, most can’t operate below $44.00 a barrel. If we get into a sustained sell-off we will see what we saw a couple of years ago as producers start to make large cutbacks. As the hedges that kept the shale producers operating in recent months diminish, the banks may force them to either shut down or put hedges in at higher prices. In other words, prices must hold or get ready for another sector crash.
Yet, despite the failure of oil to get a bid I still believe that the market will tighten. Shale oil wells are being drilled but not completed and with the recent price drop, drilling activity may slow. That means that the IEA will have to lower their projection for shale and even Canada oil sands output. Still, that did not help prices yesterday as oil saw its lowest close in seven months and failed to get the market adjusting to a lower for longer attitude and producers believe it may impact spending.
Weak U.S. gasoline demand is another reason the trade is skeptical. The IEA predicted that U.S. crude supply will increase by 430,000 barrels a day this year and will grow by 780,000 barrels a day in 2018 and that prediction is still weighing heavily. Technically the market is poised for a recovery. Now that oil is trading the September contract, there may be a new attitude. We are going to listen to future OPEC comments as the cartel may try to talk about another production cut.