Oil prices have been steady for nearly two weeks now with New York futures trading within a dollar or so of $32 a barrel and London trading around $34. Inventories continue to build, with US crude stocks climbing to a new high of 507 million barrels. The last time these inventories exceeded 500 million barrels was in 1930. Crude stocks at Cushing, Okla. climbed by 333,000 barrels to 65 million barrels last week. Cushing is getting very close to its nameplate capacity of 70 million barrels with some smaller operators storing oil there having trouble finding enough swing space to blend different grades of crude. Gasoline stocks fell for the first time in several weeks, likely due to the low retail prices across the US. Distillate stocks, however, continued to build. Concerns are increasing about a buildup of gasoline stocks in the US Midwest. There is much excess gasoline in the region so that some refiners are being forced to cut back on production, adding to the crude glut.
Most of the oil news this week has come out of the IHS-CERA annual oil conference in Houston which attracts some 2,800 industry leaders from all over the world, several of whom made headline worthy announcements during their speeches. Saudi Oil Minister al-Naimi said that his country will not cut production despite the speculation that the recently announced production freeze would eventually lead to production cuts. Al-Naimi also said that his country could get along on $20 a barrel oil and thus it is the high-cost producers, several of whom are OPEC members, that will have to cut. Iran seconded the no cuts policy by saying that the Saudi-Russian freeze was “ridiculous.” Iraq fell somewhere in the middle by saying that it wants to increase production to 6 million b/d, but will do in gradually over the next 4 years so as not to upset the markets.
The bottom line is that the Saudis, Iran, Iraq, and Libya have no interest in cutting production so that a major price rebound will have to come from gradual increases in demand over the next couple of years. The IEA weighed into the fracas by saying that it could take years for the crude glut to disappeared. The Agency has become enamored with US shale oil, predicting that after the current market crash is over and prices return to circa $80 a barrel in 2020, shale oil production will rise again. The so-called “efficiencies” (mostly pay cuts) that have kept the US shale industry producing more than expected are supposed to be a spur to send production to new highs. Several outside observers have noted that the shale oil industry currently is drilling only in the more productive “sweet spots” so that future increases in output will be coming from less productive wells.
Gloom and doom continue to prevail across the oil industry, with banks across the world writing off hundreds of millions in bad loans to oil companies. Investment continues to drop so quickly that the IEA is concerned as to how long it will take the industry to get production growing again after the price rebound.
US natural gas prices continued to slip this week and are now trading around $1.78 per million BTU’s. This is within 2 cents of the 16-year low set last December.
The Middle East is as bad as ever. The key pipeline that exports oil from Kirkuk and Kurdistan to Turkey is still out of service which leaves the Kurds without any oil revenue. There are few details as to where or why the pipeline has been disrupted, but giving the growing hostility and fighting among, the Turks, Kurds, and ISIL almost anything is possible. There are many doubts that the Syrian ceasefire announced for this weekend will come to pass.