Prices Cut Again

Jim Brown
 
Printer Friendly Version

The Energy Information Agency cut its forecast for crude prices in 2016 and 2017 despite the recent short squeeze that lifted WTI to $38.

In the EIA Short-Term Energy Outlook released on March 8th, the agency forecasts Brent crude prices will average $34 in 2016 and $40 in 2017. That is $3 lower for 2016 and $10 lower than prior 2017 forecasts.

The EIA expects WTI prices will average the same as Brent because of the recent decision to allow exports of WTI. That means the glut of light crude in the U.S. will be somewhat lessened but it also means we will import more of the heavy crude that is sold at discounts to Brent.

The EIA lowered their forecasts because U.S. production has been more resilient than previously expected. This has led to higher inventory levels and the reduction in available storage capacity. As global storage capacity becomes more limited with approximately 2.0 mbpd going into storage every day, it will further depress prices. As storage capacity shrinks the cost of storing oil rises. More tankers will be used for floating storage and they are more expensive than tank farms. This requires owners to pay less for the oil in order to afford the storage fees and still hope for a profit some months into the future.

Lower economic activity has also depressed demand growth projections. The EIA now believes demand will grow by 1.1 mbpd in 2016 and 1.2 mbpd in 2017. That is a reduction from prior forecasts of -100,000 bpd for 2016 and -200,000 bpd in 2017.

The EIA is expecting global GDP to grow 2.3% in 2016 compared to 2.4% in 2015. That is down from 2.6% growth in the prior forecast. China is weighing on the outlook after they reported a -24% decline in exports for February.

The EIA expects U.S. production to average 8.7 mbpd in 2016. Since we started the year at roughly 9.26 mbpd that represents an expectation for a decline to something in the 8.4-8.5 mbpd range by the end of the year. The peak in 2015 was 9.61 mbpd on June 5th. The implication here is for U.S. production to decline about 1.2 mbpd from that June peak. They also expect a decline of another -200,000 bpd in 2017 to 8.2 mbpd.

The recent short squeeze in crude prices has been powered by hopes that OPEC producers and Russia will agree to a production freeze that limits production to February levels. Speculators hope that a freeze agreement will give them common ground for a production cut when OPEC meets on June 5th. There has also been rumors of an emergency OPEC meeting for late March. All of these hopes are just wishing on a rainbow.

Multiple OPEC producers have said they will not agree to a freeze unless Iran and Iraq agree and both have said no chance. Iran is projecting a 700,000 bpd increase in 2016 and Iraq is at record levels and rising. Iraq has had some problems recently with 800,000 bpd being delayed by outages of two pipelines. They are not going to agree to a production freeze at 800,000 bpd below their capabilities. Kuwait was the latest to say no deal unless everybody agrees.

There was supposed to be a meeting in Moscow of all the OPEC nations to agree to the freeze but Russia said today that meeting is no longer likely because too many countries are resisting a partial freeze.

Long contracts in the WTI futures are at record levels and we may run out of buyers soon once the negative freeze headlines become more prominent. The current futures contract expires on the 21st and I seriously doubt it will see a price spike ahead of that expiration rather than a price decline.

Crude prices are hovering around $38.50 today and that is solid resistance. A break above that level could see some more short covering but it may be short lived.



The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

Free Trial Now

  Active Rigs

Active drilling rigs declined -13 to 489 for the week ended on Friday 3/4 and that is another 18 year low. That is only ONE rig above a 65-year low at 488. Oil rigs fell -8 for the week to 392. Active gas rigs declined -5 to 97. Active rigs have now declined -1,442 since the high of 1,931 in September 2014. Active offshore rigs were down -1 at 24.


Oil Inventories Week Ended 3/04/16

Crude inventories rose +3.9 million barrels to 521.9 million and a new record high.

Refinery utilization rose from 88.3% to 89.1%.

U.S. production rose +1,000 bpd from 9.077 to 9.078 mbpd.

Cushing inventories rose +600,000 barrels to 66.9 million and a new record high. Cushing only has 3.0 million barrels of available capacity at that level.

Gasoline inventories fell -4.5 million barrels to 250.5.

Distillate inventories fell -1.1 million barrels to 162.5 million.

Details in the graphic are for the prior week. All numbers are not available until the Friday of the following week. In the graphic below green represents a recent high and yellow a recent low. The blue-green represents a record high.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

Free Trial Now

Archives:200920102011201220132014201520162017