The oil price rebound which began in late January continued through Monday of this week. On Tuesday and Wednesday, however, prices slipped as US stockpiles continued to climb and two major investment banks issued reports forecasting that prices would fall still further in the next few months. New York futures closed Wednesday at $48.84 and in London at $54.66. Prices are now up 10 percent from late January lows, but still down 54 percent from last June.
The large drop in active drilling rigs in the US, and the assumption that US oil production would soon start falling too, sparked the recent rebound. The price spike was supported last week by a report from OPEC, hardly a disinterested party, forecasting that US oil production would fall and that prices would be much higher before the end of the year as the demand for OPEC’s oil increased.
This week’s stocks report brought the news that US domestic oil production grew last week by 49,000 b/d to 9.2 million which may be an all time high for US oil production; that crude stocks grew by a larger than expected 4.9 million barrels to at least an 80-year high; and gasoline stocks were up by 2 million barrels vs. the 200,000 analysts had been expecting. With US refineries shutting down for maintenance and the changeover to summer gasoline, most analysts expect that inventories will continue to increase for at least the next few weeks. Without any surge in demand, and none is currently in sight as the Chinese economy falters, the oil glut seems likely to continue for the next few months.
Nearly all observers are saying that oil prices will eventually move higher, but that they are unlikely to stabilize at the higher level until there is solid news concerning major supply reductions, either from the US shale fields or from OPEC. A major geopolitical upheaval in the Middle East or perhaps the Ukraine could also spark higher prices at any time.
This week Goldman Sachs released a sophisticated new supply and demand analysis, which concludes that the current decline in prices is being driven by an oversupply in the global oil market.  Even more interesting, however, is that the coming equilibrium between supply and demand will be at much lower oil prices than we have seen over the past decade. Goldman Sachs also concludes that by the 4th quarter, US shale oil production will have grown by another 615,000 b/d over December 2014 and that the number could be even higher.  Most of the rigs being pulled out of service are those drilling in the least productive parts of shale oil fields and, coupled with growing efficiency of the rigs, this may mean that a lower rig count will not cut production growth by all that much.  Citigroup raised a stir with a report that the current price rebound is just a “head-fake” and prices could still fall as low as $20 a barrel before rebounding in the 3rd quarter.
The IEA now forecasts that the US shale oil boom will continue until 2020 but that prices will stabilize considerably below the $100+ a barrel level we have seen in recent years. The agency also says that the drop in US shale output later this year will be limited which is why prices will remain in lower trading ranges.