Since the possible double bottom at $26 formed on February 11th, the oil price has staged a rally to $40 (WTI). Traders lucky enough to buy at $26 and sell at $40 have pocketed a tidy 54% profit. Very few will have been this lucky. The trade was stimulated by news that Saudi Arabia and Russia had agreed to not increase production this year, which is hollow news since neither country could significantly increase production no matter how hard they tried. Profit taking has now driven WTI back towards $37 as of 1 April.
What next? There is precious little sign of significant production falls anywhere. US and international rig counts continue to plunge. And there is little sign of global demand recovering as OECD economies buckle under the weight of misguided energy policy and debt. There is a risk of the plunge in oil price resuming.
The following totals compare Feb 2016 with Jan 2016:
- World Total Liquids down 180,000 bpd
- USA down 60,000 bpd
- North America down 100,000 bpd (includes USA)
- OPEC up 100,000 bpd
- Saudi Arabia up 20,000 bpd
- Iran up 220,000 bpd
- Russia + FSU down 10,000 bpd
- Europe up 220,000 bpd (YOY)
- Asia up 60,000 bpd
This article first appeared on Energy Matters.
Figure 1 WTI tested the $26.68 low set on Jan 20 by returning to $26.19 on Feb 11. Since then a rally to $40 has been staged and the price has moved above the near term downwards trend line. Charts have limited value in prediction and must be used in conjunction with fundamentals. For now, I don't believe this chart is providing clear direction. Fundamentals remain chronically weak and the next chart points to an ongoing plunge in price. But only time will tell.
Figure 2 At this scale, there is as yet little sign of an oil price recovery being staged. In fact, it looks like we may just have witnessed a cyclical rally in the ongoing plunge. Should WTI return to $26 and that support level does not hold then we will see sub-$20 as forecast by Goldman Sachs. It is possible that we see a destruction of the oil price by traders as we saw with the gold price a few years ago. The lower dashed line shows the lows reached in 1998 (arrow). On a deflated basis, that works out at around $15 in today's money.
Figure 3 Volatility is high when the OPV is above 4 as it was last month. High volatility is normally correlated with lows in the oil price and market indecision. We can see that volatility has fallen dramatically since last month with the orderly but small recovery in price. Sharp eyes will see a tick up when the data for March 28 are included. The April 1 fall in WTI of 3.9% will reinforce this trend of rising volatility from a high baseline. See Oil Price Volatility for further explanation.
Figure 4 The US oil and gas rig count continues its steep decline with 362 oil rigs (400 in last report) and 88 gas rigs (102 in last report) counted on Friday 1, April. And yet, US oil and gas just keeps on gushing most likely from the substantial backlog of drilled but uncompleted wells.
Figure 5 This month I include this stacked chart to hammer home how serious the rout in US drilling has become. During the last real price crisis of 1999, the oil+gas count fell from 1000 to 500 units. This time it has dropped from 2000 to 450 units (dashed line) and the direction is still clearly down.
Figure 6 The near-term peak in US production was 13.24 Mbpd in April 2015. The February 2016 figure was 12.60 Mbpd, down 640,000 bpd from that peak and down 60,000 bpd from last month.
Figure 7 OPEC production has been rock steady for 12 months (dashed line) and currently stands at 31.90 Mbpd, down 100,000 bpd on January. New OPEC member Indonesia is included with Asia, since changing baselines distort the picture (Figure 15).
Figure 8 With the exception of Saudi Arabia and Iran, OPEC spare capacity is now all but zero. Iran has been slowly ramping production and Iranian spare capacity is now in decline (Figure 10).
Figure 9 In February, Saudi production stood at 10.23 Mbpd, up 20,000 bpd on January. NZ = neutral zone which is neutral territory that lies between Saudi Arabia and Kuwait where production from the Wafra heavy oil field is now effectively zero. Saudi Arabia is effectively pumping at capacity. The fabled 2 million bbls per day spare capacity is either a figment of imagination or heavy oil that has no refining market.
Figure 10 Iran continues to increase production at cost of spare capacity that is in decline. In February, Iranian production stood at 3.22 Mbpd, up an impressive 220,000 bpd on January. Iranian spare capacity is now estimated to be 380,000 bpd and they are now about half way to resuming full production according to the IEA estimates. The IEA has not yet revised its view on the eventual production capacity of Iran, which stands at 3.6 Mbpd.
Figure 11 Unlike everywhere else, drilling activity in ME OPEC remains high with over 150 rigs operating in these 4 countries. Iran and Iraq are not included since their drilling history is so scarred by wars and sanctions and this distorts the picture.
Figure 12 The international oil rig count continues its decline, down another 28 in February. While US rigs are down at levels seen in the 1999 crash (Figure 5), international rigs, that include the robust Middle East, have a long way to go before they reach that level. The reasons for this would be a good topic for discussion in comments.
Figure 13 Russia and other FSU produced 14.17 Mbpd in February, down 10,000 bpd effectively unchanged on last month and little changed for 3 years (dashed line). Close examination shows that Russian production has been rising slowly while other FSU has been falling slowly. Russia has now agreed to not raise production in 2016.
Figure 14 The cycles in European production data are down to summer maintenance programs in the offshore North Sea province. We are now on the cycle high, and North Sea production may fall in the coming months as maintenance programs get underway. New data and data revisions now show that the North Sea has been turned around, with production rising slowly. Several years of $100 oil and record investment has paid off while at the same time contributing to the oil price crash.
To get an idea of the trend, it is necessary to compare production with the same month a year ago. European production is up 220,000 bpd to 3.59 Mbpd compared with a year ago.
- Norway Feb 2015 = 1.93 Mbpd, Feb 2016 = 2.01 Mbpd, up 80,000 bpd YOY.
- UK Feb 2015 = 0.88 Mbpd, Feb 2016 = 1.04 Mbpd, up 160,000 bpd YOY.
- Other Feb 2015 = 0.56 Mbpd, Feb 2016 = .54 Mbpd, down 20,000 bpd YOY.
Figure 15 This group of S and E Asian producers has been trending sideways since 2010. The group produced 7.72 Mbpd in February, up 60,000 bpd. Note that Indonesia (an oil importer) has rejoined OPEC. The OPEC production numbers are reported ex-NGL by the IEA and this has meant a 170,000 bpd drop in reported Indonesian production that contributes to the blip down on this chart.
Figure 16 N American production looks like it topped in April 2015 at 20.12 Mbpd. Group production now stands at 19.63 Mbpd down 100,000 bpd on last month and down 490,000 bpd from the April 2015 peak. This remains a trivial decline but at some point the collapse in US drilling is going to bite hard (Figures 4 and 5).
Figure 17 Total liquids = crude oil + condensate + natural gas liquids + refinery gains + biofuel. February production was 96.51 Mbpd down 180,000 bpd on the revised January figure and down 570,000 bpd from the July 2015 peak.
Figure 18 Global stock changes reflect the imbalance between supply and demand. Surplus supply grew in 4Q 2015 at a rate of 1.8 mbpd. The oversupply situation is likely to persist throughout 2016. The IEA publishes this data quarterly so there are no revisions since the last report.