Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

After Last Week's Oil Plunge, Can Prices Recover?

Published 10/05/2017, 10:05
Updated 09/07/2023, 11:31

When oil futures dropped 5% last Thursday, analysts were quick to blame OPEC for production cuts that have, over the past four months, failed to resolve the oil glut. But the real culprits are as follows:

1. As a result of the OPEC and non-OPEC production cuts deal, financial institutions and hedge funds anticipated that global crude oil inventories would draw down more quickly than they have. When their predictions were wrong, they were disillusioned, leading to a drop in oil prices.

2. Shale oil production did not immediately rebound when the OPEC-non-OPEC production cuts began. However, over the past two months, more DUCs (drilled uncompleted wells) were quickly completed and put into production in the more profitable shale oil areas. This production jump is showing up now and putting downward pressure on the oil market. The shale oil industry currently has more potential to increase production than the conventional oil industry, but it will soon face the weight of increased service and production costs.

3. Gasoline demand in the U.S. has not risen as much as is usual for this time of year. According to the EIA, gasoline consumption is 250,000 bpd lower now than it was at this time last year. On the other hand, since oil prices fell last week, gasoline prices have since fallen. With the summer driving season approaching, U.S. drivers may soon start filling up. If they do not, it will continue to depress oil prices.

4. Speculator panic resulted in 520 million barrels of crude oil options traded on Thursday. This was the third most ever. Over 7,000 contracts a minute were traded during a time of day when usually only a few hundred change hands. The sudden volume of trade was amplified by speculators and helped exacerbate the sudden drop.

What now? All eyes are on OPEC and its non-OPEC producing friends to shore up prices with talk of extending the production cut agreement for the rest of the year. In fact, Saudi Arabia is leading the jawboning with calls for extending the agreement beyond 2017. Since last week’s sudden drop, oil prices have not rebounded. Instead, they have continued to bounce.

News at the end of April from the equity markets that the oil majors – including ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) – beat expected quarterly earnings was a false sign of success. Exxon recovered after writing down assets the previous quarter and Chevron has been helped by selling less productive assets. Much of the profit jumps came from cost cutting and unloading assets, which could hurt oil companies in years to come and do not signal, as was reported, a turn-around in the oil market.

Key factors to look at include summer gasoline demand in the U.S., summer electricity demand in the Persian Gulf, shale oil production costs, offshore production in the Gulf of Mexico and Brazilian pre-salt regions, and most significantly, Venezuelan political unrest. These factors, more so than this month’s OPEC meeting, could have the greatest impact on oil prices over the next six months.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.