The Recent WTI Oil Price Rise Is Likely To Be Short-Lived

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 |  Includes: CRK, CRUD, DNR, E, RNFTF, SD, STO, TLM, USO, XOM
by: David White

In the last month Nymex Light Crude Oil prices have risen approximately +$10 per barrel to close at $100.06 on February 10, 2014. Part of this rise has been mediated by continued problems in Libya. These have limited Libya's oil exports to roughly 500,000 bpd for the last six months or more. They had returned to 1.5 million bpd in 2012 (after the civil war). Some oil price pumpers have made a big deal out of this; and there is little doubt they have been at least minorly successful in pushing prices up.

However, fundamentals elsewhere in the world indicate that there is more than adequate oil supply at this time. A few of these fundamentals are:

  • Iran increased exports for the third month in a row (by 50,000 bpd in January 2014) to bring its export total to 1.2 million bpd for the month. Russia is currently negotiating an agreement with Iran to supply Russia with another 500,000 bpd as soon as the nuclear non-proliferation agreement between Iran and many Security Council nations can be reached. Some think that the Russian oil supply agreement will go forward even if a nuclear agreement cannot be reached. The overall belief is that Iran's oil exports are going to go up significantly soon. Before the nuclear related sanctions, Iranian exports averaged 2.5 million bpd. Iranian exports may soon recoup this level if a nuclear agreement is reached. Iran says it is seeking to raise its oil output to 4 million bpd. Since Iran has to recover from the economic hardship of the sanction years, it is likely to increase oil production quickly. It will need all of the extra oil money to pay for its economic recovery measures.
  • Iraq's draft budget for 2014 anticipates average exports of 3.4 million bpd. This is a 30% increase over 2013 exports (or + 1.02 million bpd in increased oil exports). However, January 2014 exports averaged only 2.228 million bpd, so Iraq has a long way to go to reach its goal.
  • Angola's oil production is expected to reach 2 million bpd by the end of 2015. In 2013 oil and gas production was 1.79 million bpd. Production rose 2% in 2013; and it is expected to rise further in 2014.
  • Brazilian production rose to 2.62 boepd in December 2013. This was 1.5% more than a year earlier (about +39,300 bpd year over year).
  • Libyan exports are roughly 500,000 bpd currently. However, these are expected to return to the more normal level of 1.5 million bpd at some time in 2014.
  • US crude oil production averaged 7.5 million bpd in oil production in 2013. This was an increase of 1.0 million bpd over 2012's average production. US production is expected to grow to 8.5 million bpd in 2014 (plus another 1 million bpd in 2014) and 9.3 million bpd in 2015.
  • Canadian oil production reached 6.5 million bpd in 2012. In 2013 it rose 1.2 million bpd to 7.7 million bpd. In 2014 it is expected to rise another 1.3 million bpd to 9.0 million bpd.
  • Saudi Arabian oil production fell a small amount from 9.897 million bpd to 9.767 million bpd in January 2014; but it actually increased its supply to the market from 9.819 million bpd in December 2013 to 9.916 bpd in January 2014. OPEC agreed in early December 2013 to renew a 30 million bpd output cap for the first six months of 2014. With all of the expected new oil production from cash strapped Iran and Iraq, this cap could be violated quickly in 2014. OPEC nations have often been known to pay only lip service to the agreed upon caps.
  • Russian oil production rose 1.4% in 2013 to 10.51 million bpd. Since Putin has to pay the Sochi Olympics bills and all of his promised reform bills, it is a safe bet that Russian production will be "at worst" flat for 2014. This is what the IEA expects. However, logic dictates that Russia will try to increase its oil production significantly in 2014. This might mean another few percentage points of increase in production in 2014. The December 2013 average production of 10.63 million bpd supports this thesis. The new Russian development areas in East Siberia and the Arctic are thought to be rich. Russia also has several known tight oil (shale oil) formations in Western Siberia. It appears that Russia easily has the natural resources to increase production. Since Rosneft (OTC:RNFTF) already has development agreements with western heavyweights Exxon Mobil (NYSE:XOM), Eni SpA (NYSE:E), and Statoil (NYSE:STO). Rosneft is known to be talking to others as well. The above companies are all slow behemoths; but they also all have huge development budgets that should help to speed all of the new Russian developments along. It is reasonable to think that Russian production will increase by 200,000 - 500,000 bpd in 2014, especially since Russian production was already at +120,000 bpd over the 2013 average production in December 2013.
  • Chinese oil production is up slightly in 2014 to 4,372,450 bpd from 4,346,980 bpd in 2013. Plus Chinese production has been trending upward for the last 30+ years.

There are many more countries; but I have covered many of the major producers. The supply of oil is clearly going to go up in 2014. Attempts by OPEC to restrict their supply to roughly 30 million bpd seems doomed to failure. Between Iran and Iraq the OPEC supply may go up by 2-3 million bpd. Each country will likely follow the 2014 increases with still further increases in 2015. Between the US and Canada, the world oil supply may go up by another 2.3 million bpd in 2014. They will also likely supply nearly equal increases in 2015. The other countries will likely add some further production. This all puts the extra supply coming online in 2014 at roughly +5 million bpd. The EIA says global consumption increased by 1.2 million bpd in 2013. The EIA expects a like increase in 2014. The possible extra 3.8 million bpd of supply increases over demand increases should put downward pressure on prices.

If you add in the extra 1 million bpd of Libyan production expected to return at some time in 2014, the extra supply in 2014 may come to nearly 5 million bpd. OUCH! Those expecting higher prices are being foolish. OPEC will not be able to restrict supply as much as they might desire to. Logic says oil prices have to fall. Logic says Nymex Light Crude prices will fall from their near term recent highs.

The Nymex futures prices for Light Crude -- WTI -- bear this out. At the time of this writing on February 11, 2014, the December 2014 future is $93.04 per barrel. The December 2015 future is $86.36 per barrel. The December 2016 future is $82.03 per barrel. It seems inevitable that something will go wrong with this scenario in that three year time period; but the near term trend for oil prices does seem inevitably down. The fundamentals completely support this.

With this in mind, I think investors can short oil at its near term peak in 2014. It could rise a bit further, but it seems sure to cycle down again. You only need to remain patient. Some of the North American oil companies with high or no PE's and low profit or negative profit margins seem sure to be hurt by this. If you are invested in these companies, you may wish to re-examine your investment(s). A few of the companies that likely deserve some re-examination with the above oil fundamentals in mind are: Comstock Resources (NYSE:CRK), Denbury Resources (NYSE:DNR), SandRidge Energy (NYSE:SD), and Talisman Energy (NYSE:TLM). Many more companies may fall into this category, but I could not reasonably list them all.

The long term historical chart of WTI prices since 1985 gives one a better idea of the technical pressures bearing on WTI.

From a technical standpoint, it appears that there is a pennant formation forming or almost formed. Such a formation is usually followed by a sharp break downward or upward. From the above fundamentals, it seems much more likely that the trend about to begin is downward.

The one year WTI crude oil price chart provides a probably more accurate short term technical direction.

The price is currently at a near term high. This should provide significant resistance to further upward movement. Yes, the price could go higher, but a smart play might be to short WTI oil at this point. If you can afford to stay short for six months to a year, you should be able to do this relatively safely. You should be able to make a good profit. Investors can do this with options, and by shorting mostly oil ETFs such as United States Oil (NYSEARCA:USO).

NOTE: Some of the above fundamental financial information is from Yahoo Finance.

Good Luck Trading.

Disclosure: I am short USO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.