World Energy Blog

The Oil Price Roller Coaster Picks Up more Speed.

7/20/2016 12:15:19 PM

Never a dull moment with oil prices

So now that we have seen oil prices recover to the $50 dollar level, we need to look at the drivers that might keep it there or if this is a temporary blip.

Why is the market so temperamental on oil these days?  China is having issues and that could signal lower demand, ok, Saudi and OPEC have paid a steep price to gain somewhere in the range of 2% additional market share.   Other OPEC countries, like Venezuela, are suffering big time with food scarcity and crime at an all time high.  It seems that the dependency on oil revenue doesn't jive well with mismanagement and socialist tendencies. Even with internal pressures, OPEC/Saudi continue the "pump and dump" strategy.  This keeps prices in check and prevents upward pressure.

However, another OPEC country is having a hard time pulling it's weight.  Nigeria has seen all time lows in production thanks to those pesky rebels shutting down refineries and pipelines.

Of course this doesn't take into account the Brexit and what that will mean for the North Sea and natural gas for the UK.  Could US exports to the UK begin for natural gas?  Will the BREXIT make it easier or harder for UK companies to develop resource.  All of this adds uncertainty and that should pressure oil up.

What about instability in the EU?  Another fear that hides in Greece is that as a failed state it shows that fiscally irresponsible, or liberally spending governments cannot put viable economies together.  This spells trouble for the rest of the European states, and for that matter could cast doubt on the US and China. (The US has become increasingly "Greek Like" and China has shown that it doesn't have the control over it's markets that we all thought it had) 

However, looking at the EU in regard to oil prices doesn’t really explain the swings we are witnessing.  The US brokered a deal with Iran that will lift sanctions on the country.  This should have put a significant amount of unsold, previously unavailable supply on the market and that is bad for traders.  Of all the things pushing prices down this one had the most potential, however, Iran has not been able to make good on the promise.

Iran had a substantial amount of oil floating offshore stored in tankers—40 million barrels according to an estimate by IHS. Several international organizations estimate that Iranian oil fields could put 400,000 to 600,000 barrels a day of additional production into the world market over several months.

The wild card in the Middle East remains the unrest caused by ISIS and other less than savory individuals, the recent uprising in Turkey and the violent crack down do not bode well for stability in the region.

Additionally Russia is the main supplier of natural gas to Western Europe and soon will be for China as well.  This puts Russia in a powerful position to push supply contracts on current customers and shut out others.  At the same time, Europe is seeing a flood of immigrants that seem only too willing to cause disruption.  If they manage to topple one or two economies, it puts further downward pressure on prices.

When we look at oil, no one scenario can possibly rule the day.  What happens in Venezuela and Mexico counts as well.  Mexico has had a series of lease sales that have produced very little activity, deepwater seems too expensive with today's prices. Also the question remains on whether the current commitment to open markets will remain.

To make it a little more confusing we have started oil exports from the US.  This puts more US supply at hand to offset any disruptions elsewhere, but more than anything it should bring WTI and Brent pricing into parody.  Domestic producers can now compete on a global scale, but that doesn't mean there is a market to sell into.

With our shale producers shutting down at these prices we may find that we don't have a lot of crude to export, so it may be a moot point.

Where is it going, round and round and nobody knows, where will it land…we just have to wait and see.