Oil prices dropped to new lows last week, completely erasing all the gains made since OPEC originally cut production back in November 2016.
The fear is that persistent oversupply will continue to weigh on crude oil markets. Both the IEA and OPEC came out with forecasts this week that admitted that the adjustment process is happening much slower than they expected. That pulled down WTI and Brent, but when the U.S. EIA reported an uptick in gasoline inventories on Wednesday, oil prices really tanked. Oil prices are closing out the fourth consecutive week of losses – the longest string of weekly losses in two years.
Both the IEA and OPEC said this last week that the oil market was adjusting slower than they expected. The IEA also said that non-OPEC production growth next year will reach 1.5 million barrels per day (mb/d), a volume that will exceed total global demand growth. That means that OPEC will be backing out production only to see non-OPEC producers fill the void.
Everyone expects strong production growth from U.S. shale this year; the only discrepancy in predictions is over the magnitude of growth. But the sudden drop in oil prices has raised a few questions about the durability of the rebound. With drilling campaigns already underway, output growth is probably locked in for the next few months, and likely, for the remainder of the year. But the outlook for 2018 is still up in the air.
Right now the shale industry has locked in its 2018 production with hedges at a much lower rate than it did at this point last year. The lower rate of hedging will increasingly expose shale drillers to low prices going forward. And without a rebound in prices, they won’t be able to get those hedges at $50 per barrel like they did last year. Without that certainty, they will be forced to try to drill in a lower price environment. In all likelihood, if prices stay in the mid-$40s or drop further, the shale boom could be curbed.
The EIA said in its Short-Term Energy Outlook that it expects global inventories to fall modestly in 2017 but to increase again next year because of shale growth combined with production increases in Brazil and other non-OPEC countries. The return of OPEC production on the expiration of their agreement could flood the market again.
Reuters reported that oil traders are turning to floating storage again in Asia, a very bearish signal about the state of the oil market. About 10 very large crude carriers (VLCCs) have been chartered since May. “Too much unsold oil is headed to Asia,” said Oystein Berentsen, managing director for oil trading company Strong Petroleum.
The U.S. Senate passed a bill by an overwhelming 97-2 vote that would increase sanctions on Russia in response to election interference. The measure would enact new restrictions on companies that support Russian “energy export pipelines.” The move has angered some European leaders that support the pipeline. The German and Austrian governments issued a joint statement calling it a “new and very negative quality in European-American relations.” The statement said that “Europe’s energy supply is a matter for Europe, not the United States of America.” The passage of the bill caused the share prices of the companies involved in the pipeline
Bloomberg New Energy Finance in its New Energy Outlook (NEO) last week, predicting a faster adoption of solar and wind than previously expected. Even though natural gas continues to take market share away from coal in the electric power sector, even natural gas will succumb to the renewables revolution over time. By 2040, BNEF says that solar and wind will account for half of the global electric capacity market. And that even assumes that subsidies for renewables expire.
