It has been a volatile week for oil with prices settling Wednesday at $38.32 in New York and $39.85 in London.  Some traders still seem to be fascinated by the upcoming meeting in Doha on April 17th to “freeze prices.” Others keep watching the ever-increasing global oil stocks and say the six-week rally from the high $20s to over $40 a barrel has been overdone, and lower prices are coming in the immediate future.  US crude stocks rose by 2.3 million barrels last week to a record high of 535 million barrels. This was the sixth straight increase in US crude stocks. While the 2.3-million-barrel gain was below what the Wall Street analysts had been expecting, it came despite a large drop in US crude imports for the week and a surge in refinery utilization.

Observers note that in recent weeks hedge funds and other money managers have established a near-record number of long positions in the futures market in expectation that prices will recover later this year and next. This buying has been partly responsible for the surge in prices despite the fundamental signals from supply and demand that the markets should not be moving higher as yet.

A new survey of producers showed a 100,000 b/d increase in OPEC’s production during March, which only adds to the concerns about a glut. On Tuesday, Saudi Arabia and Kuwait announced that they would resume production of about 300,000 b/d at the jointly operated Khafji field. This action only adds to the concerns about whether the Saudis are serious about a production freeze or whether the Doha meeting is simply a big show to drive up oil prices without freezing or cutting oil production. Nearly all those attending the meeting, with Iran as an observer, are pumping flat out already.  Iran has increased output by 230,000 b/d since December and keeps announcing that it will not stop production increases until they climb from the sanctions level of 2.9 million b/d to 4 million b/d.

It now seems likely that only US shale oil production will fall significantly during the remainder of the year. The US oil industry is in turmoil due to the low prices, and many shale oil producers are stacking their rigs and/or going bankrupt.  Some observers note that the US has a large backlog of wells that have been drilled but not yet fracked. As many of these are being acquired by new owners very cheaply, the costs of putting them back into production profitably will be considerably below that of the original owners. In effect, much of the cost of acquiring drilling rights and drilling the wells will have been absorbed as losses by the banks and other investors in the original operations. Many are saying that the US shale oil industry can increase production quickly after oil prices rebound another $20 or so.

The global decline in capital expenditures continues to roll along. Last year the seven largest Western energy companies replaced just 75 percent of the oil and gas they extracted. It was the biggest drop in combined inventory in a decade. For Exxon, it was the first time in 20 years that the company did not replace the amount of oil and gas it produced. It should be noted, however, that in recent years several of the larger oil companies have been using natural gas reserves as an “oil equivalent” or proxy for the oil reserves they no longer have.  As national oil companies took over much of the world’s oil reserves, it has been increasingly difficult for international oil companies based in the US and Europe to maintain reserves –thus the substitute of natural gas reserves which are more readily obtainable, frequently through mergers.