Peak Oil Review: A Midweek Update – 16th June 2016

Oil prices have fallen for the last five trading sessions leaving many to wonder if the surge in prices which has brought futures from the high $20s to over $50 a barrel may be ending. New York futures settled Wednesday at $48.01 and London at $48.97. The primary driver of the markets this week has been concern about what will happen if Britain votes to leave the EU on June 23rd. These fears have kept the dollar high recently, and this subsequently pressures oil prices.  Some traders fear that a vote to leave the EU will result in a period of chaos in the financial markets and are closing out futures positions to ride out any turmoil that should erupt.
 
EIA reported that US crude stocks were down by 933,000 barrels last week, less than analysts had been expecting, but much lower that the 1.2 million barrel increase the API reported.  Given the more than 3 billion barrels currently in storage tanks, small declines are meaningless these days.
 
Several conflicting reports on where the oil markets are headed were issued this week. The IEA is anticipating that supply and demand will be balanced next year. If the unplanned outages in Nigeria, Libya and possibly Venezuela are not resolved, however, the balance could turn into outright shortages in current production.  The report assumes that OPEC will increase its production from the 32.6 million b/d achieved in May to an average of 33.3 million the next year. If OPEC does not achieve this goal, the forecast rate of production, oil stocks could fall much faster than anticipated in the next 18 months. For OPEC to increase oil production next year, there will have to be some settlement in Nigeria, Libya, or Venezuela that will at least maintain or increase OPEC’s current oil production. While Iranian oil output is expected to increase, it will not be enough to replace losses elsewhere. The course of China’s economy will also be a major factor in the arithmetic that balances the oil markets.
 
Goldman Sachs, however, calls the recent oil price recovery of as much as 95 percent “fragile” and was mainly caused by hype about production freezes and unplanned outages in Canada and Nigeria.  Goldman expects oil prices to remain around $45-50 a barrel, noting that anything higher would likely bring more US shale oil back into production eliminating any deficit. Many US shale drillers have cut expenses to the point that $50 oil will bring more rigs back into production as we have seen in the last two weeks.
 
A new analysis shows that OPEC will likely earn about $341 billion this year, down about 15 percent from the $404 billion it received last year. This was down 46 percent from the 2014 earnings of $878 billion. Wood Mackenzie says that the oil and gas industry will cut $1 trillion from planned spending on exploration and development in the next five years.
 
Venezuelan security arrested some 400 people on Wednesday during the latest round of looting and food riots across the country. Washington and Caracas will hold high-level talks to see if a solution can be found to the situation in which mass starvation and societal collapse seems imminent. The Maduro government continues to blame its troubles on the US; but many recognize that the US is the only country capable of quickly providing the necessary humanitarian assistance. Washington is likely to insist that the Maduro government must go. 
 
There is still no end in sight to the problems in Nigeria. The insurgents are now threatening to attack offshore platforms and to conduct attacks that cause casualties rather than just blowing up pipelines in the jungle.