Capitalist Times covers the All the News that’s Fit to Profit, and its sister publication Energy & Income Advisor is our in-depth guide to energy and income investing. For those readers interested in EIA’s deep dives and more tactical take on energy markets, read Elliott’s take of crude oil’s recent pullback in price.
Crude-oil prices collapsed last week due to a combination of fundamental and technical factors.
On the fundamental front, the rapid recovery in US oil production has been and will remain the biggest story in 2017. According to weekly data from the Energy Information Administration, US oil production stands at 9.293 million barrels per day—up more than 780,000 barrels per day since last October alone. That’s a gain of 130,000 barrels per day each month.
Within OPEC, Libya and Nigeria have stepped up their oil output. In the past, Libya’s production gains have proved fleeting because of clashes among militants that sometimes disrupt pipelines, ports and production facilities. However, recent news suggests that the country’s output has climbed to more than 700,000 barrels per day—the highest level since late 2014.
Nigerian production appears to be stabilizing around 1.6 million barrels per day. If negotiations between the government and militants in the Niger Delta continue to bear fruit, output could recover to at least 2 million barrels per day over the next six to nine months.
US oil inventories also remain elevated, despite recent drawdowns.
Bullish commentators point out that oil stockpiles usually build into early May and decline thereafter; accordingly, a counter-cyclical decline in inventories suggests that the market has tightened.
Although US oil inventories have declined, this phenomenon reflects refineries running at higher-than-usual utilization rates for this time of year. At the same time, US gasoline demand has weakened relative to year-ago levels, and inventories of the transportation fuel have built since April. Historically, gasoline stockpiles fall until late May and then flatten out through the summer months. Bottom Line: The Counter-cyclical decline in US oil inventories stems primarily from the bearish build in gasoline stocks.
The market also appears to be coming to grips with OPEC’s reduced market power.
Odds are that OPEC will extend the output reductions announced last fall for another six months; however, the market has already priced in this outcome. Market chatter has shifted to the potential for OPEC to extend or deepen cuts to rebalance inventories. This scenario would bolster oil prices and government revenue in the near term while supporting stepped-up drilling and completion activity in US shale plays.
Last week’s selloff accelerated when crude-oil prices tumbled below their 200-day moving average of about $49 per barrel and its March low of $47 per barrel. The next areas of technical support are $45 per barrel and between $42.50 and $43 per barrel, followed by its August 2016 low between $39 and $40 per barrel.
Hedge funds appear to be abandoning their long bets in crude-oil futures, reducing these aggregate reported positions by more than 50 million barrels to about 335 million barrels. This position remains elevated compared to “normal” levels from last year. And hedge funds’ reported short positions remain under 80 million barrels, well below the March high of 117 million barrels and the 150 million to 200 million barrels that marked the commodity’s lows in 2016.
We have called for West Texas Intermediate to dip to between $40 and $45 per barrel. Odds are good (better than 50 percent) that the benchmark will approach the low end of this price range before stabilizing.
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Elliott H. Gue is founder and chief editor of Capitalist Times and Energy & Income Advisor.