Crude oil market gives investors wild ride
The crude oil rollercoaster continues.
West Texas International, or WTI, is the benchmark grade of crude oil produced in the U.S. and serves as one of the three main pricing barometers of the global petroleum industry. On June 21, WTI closed at $42.53/barrel, capping a punishing 10-week decline as prices plummeted by 20.4 percent. Since then, WTI has surged more than 22 percent, reaching $52.22/barrel, the highest price for the black gold since April.
These massive, yet conflicting swings in oil prices have been driven by a common denominator – the global surplus of crude oil.
For nearly three years, the world has been awash in a glut of surplus crude oil, stoked by near-unrestrained production from the global crude oil superpowers. The origin of this surplus can be traced to the October 2014 decision by the Organization of the Petroleum Exporting Countries, or OPEC, to flood the market with oil. The 14-nation oil cartel, led by Saudi Arabia, accounts for nearly 44 percent of the world’s crude oil production. The goal was to drive down oil prices and cripple its competition, primarily the United States. As global inventories surged, the price of oil fell from over $100/barrel in 2014 to under $30/barrel in January 2016.
However, recent data suggests the crude oil markets have finally started to rebalance, where global consumption is matching production. This should help draw down the massive three billion barrels of surplus crude oil that currently plagues the oil industry. As a result, oil prices have soared. But what has changed in the past few months to indicate the crude oil markets have rebalanced?
First, global demand continues to be stronger than expected, driven by the U.S., the world’s number one consumer of crude oil. The International Energy Agency, or IEA, reports that global demand for crude oil in the second quarter was at its highest rate in two years. In August, the IEA revised upward the projected 2017 annual growth in demand for crude oil by 6.7 percent.
Just as important, global crude inventories have begun to decline. A key part of this supply draw-down is attributed to a leveling off of production by the top global producers: Russia, a Saudi Arabia-led OPEC and the U.S. In January, Russia and OPEC, whose oil-dependent economies had become decimated from ultra-low oil prices, agreed to collectively reduce production by 1.8 million barrels per day, representing about 2 percent of the world’s daily production. For the U.S., the world’s third largest producer, the break-neck pace of crude production over the past year has slowed. The average daily production rate for 2017 was revised downward from 9.35 to 9.25 million barrels per day. In 2018, expected daily production was reduced from 9.91 to 9.84 million barrels per day.
The recent data has been the most bullish news for crude oil this year. Yet the key question remains – can the current rebalancing effects be sustained?
The consensus among the major U.S. and international energy agencies is that consumption of crude oil will remain strong through the rest of 2017 and 2018. Robust demand for energy products, be it crude oil, gasoline, natural gas or others, is indicative of a vibrant consumer and economic landscape. But the supply side of the rebalancing equation is what has many market experts pondering. Yes, the massive production scale of the U.S. oil industry has tempered. However, output is still expected to climb, even if gradually, to a 48-year record in 2018. Also, Russia and OPEC’s production cut agreement is set to expire in March 2018. If not extended, an extra 2 percent of global crude oil could flood the market.
A line has certainly been drawn between a drill-happy U.S. oil industry and their OPEC-led counterparts, whose oil-dependent economies are craving higher prices. Unfortunately for OPEC, it does not possess the ability to indefinitely extend its production cuts. Moreover, its goal for higher oil prices only invites further drilling by American producers.
For now, the crude oil markets continue higher. But as recent history has shown, investors may want to fasten their seatbelts.
Mark M. Grywacheski, Investment Advisor
Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.
Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
