Dave here. A very good look at the various issues. Optimism reigns supreme among oil traders, it seems…
By Nick Cunningham, a Vermont-based writer on energy and environmental issues. You can follow him on twitter @nickcunningham1. Originally published at OilPrice
Oil prices have posted their strongest rally in years, jumping an astounding 27 percent in the last three trading days of August.
While much of the recent price movement defies reason and is enormously magnified by speculative movements by traders to take and cover their bets on oil, still, there were a series of rumors, events, and fresh data that helped contribute to the spike.
For example, on August 31, the oil markets woke up to the news that Russian President Vladimir Putin will meet his counterpart from Venezuela to discuss “possible mutual steps” to stabilize oil prices. The meeting will take place in China on September 3. Venezuelan President Nicolas Maduro has already called for an emergency meeting of OPEC, a call that has fallen on deaf ears, at least in the most important country of Saudi Arabia.
It is still highly unlikely, but the one country that might be able to change the minds of Saudi oil officials is Russia. Again, even if Russia promised to cut back oil production to boost prices (which it has not shown a willingness to do), Saudi Arabia has little trust in Moscow to follow through on those promises. Similar understandings to cooperate in the past have fallen apart, making coordinated action unlikely.
Moreover, it is not at all clear that Russia’s best move is to cut back on production. Sure, it wants higher oil prices, but selling less oil will arguably offset price gains. And the depreciation of the ruble has cushioned the blow of low oil prices – Gazprom just reported a 29 percent gain in net profit for the second quarter compared to a year earlier, largely due to a weaker ruble. So, Russia is eager for oil prices to rebound, but the Kremlin is not as desperate as Venezuela.
Yet, bringing Russia to the table was enough to raise the prospect of OPEC production cuts, at least for oil traders, which bid up the price of oil on August 31.
Adding to the speculation was a new OPEC bulletin, which included a commentary about the state of the oil markets, entitled, “Cooperation holds the key to oil’s future.” Most of the article was unremarkable analysis about rising oil demand, but the article concludes with this:
“Cooperation is and will always remain the key to oil’s future and that is why dialogue among the main stakeholders is so important going forward. There is no quick fix, but if there is a willingness to face the oil industry’s challenges together, then the prospects for the future have to be a lot better than what everyone involved in the industry has been experiencing over the past nine months or so.”
In all likelihood, that is a throwaway line paying lip service to collective action, with no substance behind it. But the oil markets saw a glimmer of hope in a reevaluation of the group’s strategy, possibly portending a production cut. No doubt the Venezuela-Russia meeting added fuel to that speculation. Oil markets, as irrational as they are, don’t need confirmation to bid up prices. Oil prices jumped by more than 8 percent on the last day of August.
But another major reason that oil prices shot up at the end of August was due to very significant revisions by the EIA on U.S. oil production data, pointing to sharper contraction than was previously assumed. The EIA released new survey-based data, which is more accurate than their mere estimates based on extrapolation, and the new data showed that between January and May, the U.S. actually produced 40,000 to 130,000 fewer barrels per day than the agency previously reported. Then, in June, oil production dropped by 100,000 barrels per day from the month before, hitting just 9.3 million barrels per day (mb/d).
The largest downward revision came from Texas, which has been producing 100,000 to 150,000 fewer barrels than previously reported for the first half of this year.
To put that in perspective, consider the agency’s own weekly data, which comes out every Wednesday, and although it is less accurate than the retrospective looks, oil prices move up and down in response to the results. In its weekly data, the EIA shows U.S. oil production above 9.5 mb/d through the middle of July. For the week ending August 21, the EIA says the U.S. is producing 9.33 mb/d, above what the agency now says the U.S. produced in June.
In other words, for several months the oil markets had believed the U.S. was producing much more oil than it actually was. Instead of continuing to climb through much of the spring and leveling off into the summer, oil production actually peaked in April and has declined consistently since then. When the EIA released this latest revision on August 31, oil prices shot up.
Finally, although probably not quite as important as the OPEC rumors and the EIA data revisions, Canada suffered some outages at its oil facilities that could lead to a disruption in supplies. Canadian Oil Sands had to shut down production of its synthetic crude oil facility after a fire damaged equipment. And Nexen Energy, an oil producer in Canada and subsidiary of China’s CNOOC, had to close 95 pipelines after inspectors found problems with them. Neither company offered specifics on what the disruptions mean for their production levels, but if the outages persist, they could cut down on supplies. Canada’s benchmark for synthetic crude rallied on the news.
Citigroup analysts think the recent rebound is overdone, calling it a “false start,” and the 27 percent gain in just three days was “driven by a misread of market data and financial headlines.” Indeed, the largest three-day price rally since 1990 was driven by headlines, but given the severe volatility and huge price swings, oil prices are not trading on the fundamentals right now. Nobody knows what will happen next.
Could it be that the search for safety in the turbulent markets view oil as the more recoverable commodity? Yet another diversification?
It seems weird that just rumours about Opec and revised data figures could lead to such a huge upsurge in prices. The revised data figures for the US seems particularly odd – surely if it turns out there wasn’t so much crude in the market, but this didn’t put the price up, this indicates that demand is weaker than everyone thinks? Seems an odd logic.
I suspect that for whatever reason the market is expecting a huge surge in price and are, a bit like 100 metres sprinters on the line, occasionally jumping the gun. This would match up with the news a few weeks ago that some hedgies are betting big on domestic oil producers. I wonder if they are assuming that the US government will start putting pressure on the Saudis to reign back production after the election? Received wisdom of course is that the US always wants low prices, but now that expense tight oil is so important, it may be that someone important feels that $100 a barrel oil is in the US strategic interest. Now that the Iran deal is sealed, maybe they will be looking for an excuse to pick a fight with the Saudis.
We don’t know what will happen to oil prices in the future, so people should be cautious, and avoid committing themselves to large fuel purchases for a long period of time. In other words, when it’s time to buy a new car, get one that has good fuel mileage. Avoid large SUVs unless there’s absolutely no satisfactory alternative. Buy a vehicle that’s specifically designed to save on fuel use.
We don’t know what will happen to oil prices in the future
It will go up. You can write that down and seal it in an envelope.
So as always, it’s prudent advice to evaluate desires tempered by needs, then and buy what you can afford…ahhh screw that…
Skip the minivan or the jellybean shaped car and put in a lowball bid for a http://www.rmsothebys.com/lf15/london/lots/1969-de-tomaso-mangusta/1077215
If your lucky you’ll find out if your wife really loves you when you come home with it rather than something she picked out on the Toyota lot.
Answer. QE and ZIRP induced insanity.
“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.” — J.M.Keynes
Welcome to the casino, boyzz.
“Cooperation is and will always remain the key to oil’s future and that is why dialogue among the main stakeholders is so important going forward.”
Shouldn’t that be “collusion?” As in monopoly.
Another reason to operate as a public utility.
John Kemp of Reuters had an alternative explanation:
“None of these factors, singly or in combination, is sufficient to explain an increase in the price of U.S. crude from $38 to $49 in the space of less than a week. Far more important was the unusually large concentration of short derivatives positions in U.S. crude still held by hedge funds betting prices would fall even further (link.reuters.com/pyk55w). . . The oil market is a community, subject to the same fads and fashions as any other community, rather than a mechanical system governed by the laws of physics.”