Oil Prices Slide as Supply Glut Remains
While many expected oil prices to rebound after Saudi Arabia and Russia announced in May 2017 plans to extend their production cuts initially announced in November 2016,0 this simply hasn’t happened. Since Saudi Arabia and Russia announced plans to extend oil production cuts in May, crude prices have been falling hard as the world remains saturated in oil. On June 8, 2017, West Texas Intermediate was at $45.50 per barrel; testing lows last seen in the fourth quarter of 2016. And the outlook for oil remains bearish.
Back in November 2016, the Organization of Petroleum Exporting Countries (OPEC) and allies from non-OPEC oil-producing countries, including Russia, Mexico, and the Kingdom of Bahrain, announced plans to lower production levels for the first six months of 2017. The hope was that lower production would boost sagging oil prices and replenish the coffers of the once oil rich nations.
Oil prices did rebound, but only for a short period of time. After the production cuts were announced, oil prices rebounded 25% from around $43 per barrel to $54 per barrel. But then reality set in and the fact that drilling in the U.S. and global stockpiles would easily undermine and production cuts.
In the first two months of 2017, oil prices never really broke above $54 per barrel. This wasn’t what OPEC and its allies were hoping for. From March to June, oil prices were on a roller coaster, mostly enjoying a ride to the downside.
As the deadline for the end of the oil production cut got closer, Saudi Arabia and Russia, two of the world’s biggest oil producers, renewed their pledge to cut oil production.
Cash-strapped OPEC and other equally financially cobbled big crude producers committed to pumping approximately 1.8 million barrels per day less than they supplied at the end of 2016 and would hold production levels there until the first quarter of 2018.
No one seems to care. Oil prices continue to feel pressure as demand softens and stockpiles soar. On June 7, 2017, the EIA (Energy Information Administration) announced that U.S. crude oil stocks unexpectedly jumped by 3.3 million barrels to a whopping 513.2 million barrels. Inventories of refined products were also up. The surprise glut comes at the start of the busiest period for fuel consumption—the summer driving season.1
It’s not just the U.S. and Canada that are oversupplied with oil. There is a glut of crude in Asian markets as well. According to the most recent figures, there are at least 25 supertankers (on average carrying two million barrels of oil) sitting in the Strait of Malacca and the Singapore Strait with unsold fuel.2
And more oil is on the way. Libya’s 270,000 barrel per day Sharara oil field has reopened after a worker’s protest.3
Sharara is responsible for producing nearly a third of Libya’s national output. And Libya is looking to boost production from 835,000 barrels per day to $1.25 million barrels per day before the end of 2017.
None of this bodes well for oil and gas bulls.
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- “Summary of Weekly Petroleum Data for the Week Ending June 2, 2017,” Energy Information Administration web site, June 7, 2017; http://ir.eia.gov/wpsr/wpsrsummary.pdf.
- “Oil prices resume slide as supply glut prevails,” cnbc.com, June 9, 2017; http://www.cnbc.com/2017/06/08/oil-prices-continue-to-slide-as-supply-overhang-prevails.html.
- “Libya’s Sharara oil field reopens after strike: National Oil Corp.” af.reuters.com, June 9, 2017; http://af.reuters.com/article/investingNews/idAFKBN1900V2-OZABS.