In the fast moving oil market much of the fundamental data only becomes available for general consumption at least one month in arrears. But EIA oil price data and Baker Hughes rig counts are available weekly and with much action going on it is worthwhile updating.
The price plunge seems to have reversed, at least for the time being (more on that below). But the most stunning data is the free fall in US oil drilling rigs shown in Figure 1, down 553 (34%) from the October top. The IEA also published their Oil Market Report early this month, on 10th February, reporting oil supplies were down 235,000 bpd in January, mainly in OPEC countries Iraq and Libya.
Figure 1 The US oil rig count is down to 1056 rigs from a peak of 1609 in October last year. The gas rig count continues to inch downwards slowly. The collapse in US shale oil drilling, that looks set to continue, must lead to US oil production decline in the months ahead.
Figure 2 The bounce in the oil price is as sharp as the crash and is difficult to see at this scale. Hence, move on to Figure 3.
Figure 3 The low point in Brent of $45.13 was reached on 13th January. On Friday 13th February Brent closed at $61.52, up 36% in a month. Anyone who got lucky on timing investments will have made a killing.
Where there is smoke, there is usually fire. Here is the summary from the January OMR published on 10th February. Subscribers to the OMR already have the full data which may in part underpin the current rally.
- Oil prices rebounded from near six-year lows touched in January as market participants took stock of declines in US rig counts and relatively positive US economic data. At the time of writing, ICE Brent was trading at $58.25/bbl – roughly 50% below its June 2014 peak. NYMEX WTI was at $52.55/bbl.
- Global supplies fell by 235 kb/d in January to 94.1 mb/d on lower OPEC and non-OPEC production. Reductions in capital expenditures have cut projected 2015 non-OPEC supply growth to 800 kb/d. US 2015 production is seen 200 kb/d lower than in last month’s Report, at an average 12.4 mb/d, with most of the cuts in 2H15.
- OPEC crude oil output fell by 240 kb/d in January to 30.31 mb/d, led by losses from Iraq and Libya. Output from Saudi Arabia, Kuwait, Angola and Nigeria edged up. Downward revisions to the non-OPEC supply growth forecast for 2H15 have raised the ‘call’ on OPEC to an average 30.2 mb/d – just above the group’s official target of 30 mb/d.
- The forecast of global oil demand growth for 2015 is unchanged from last month’s Report, at 0.9 mb/d, bringing average demand for the year to 93.4 mb/d.Growth is expected to gain momentum from a modest 0.6 mb/d gain in 2014, on a slightly improved macroeconomic outlook.
- OECD industry stocks slipped by 5.3 mb in December, roughly one tenth of the five-year average draw for the month. Consequently, inventories’ surplus to average levels ballooned to 65 mb from 16 mb in November, its widest since October 2010. Preliminary data point to a seasonal 22.7 mb stock build in January.
- Global refinery crude throughputs rose by 1.1 mb/d in December, to 79.1 mb/d,before maintenance curbed activity in January. An unexpected dip in Saudi Arabian runs in November underpins a 140 kb/d downward revision to last month’s assessment of 4Q14 runs, to 78.1 mb/d. Throughputs are projected to fall to 77.6 mb/d in 1Q15.
So does this mean the crisis is over? I don’t think so, but the price bottom might be in and recent action may mark the end of the plunge. Supply – demand differential movement needs to be of the order 2 to 4 million barrels per day to underpin a strong recovery in price and the half cycle normally takes about 18 months to work through the economy. So I’d expect prices to bump along bottom for a few months, perhaps testing recent lows before the long climb back begins.
It looks as though the US shale oil industry is falling on its face. This will inevitably lead to a fall in US production and that country dipping more deeply once again into international markets. This will be the main driver for a full oil price recovery. But what then? The oil industry needs a stable price environment to make long term and very large investment decisions. If higher price sends the shale drillers back into business then this will surely lead to another collapse. For many years The Texas Railroad Commission controlled Texas oil production providing price stability a role subsequently assumed by OPEC and Saudi Arabia who for many years exercised that control with great skill to the benefit of all. The oil industry, a raw symbol of capitalism, may have to accept that it cannot survive in a free market environment. It hasn’t done so in the past.