High Oil Price Volatility signals that the market has not yet decided the future direction of the oil price. Global production was marginally lower in January, but outside of the USA, oil production remains robust with rises registered in most producing areas. Production in Iran has begun to rise with 80,000 bpd added in January. US and global rig counts are in steep decline while drilling in the Middle East remains close to all time highs.
The following totals compare Jan 2016 with December 2015:
- World Total Liquids down 230,000 bpd
- USA down 170,000 bpd
- North America down 180,000 bpd (includes USA)
- OPEC up 270,000 bpd
- Saudi Arabia up 70,000 bpd
- Iran up 80,000 bpd
- Russia + FSU up 10,000 bpd
- Europe up 30,000 bpd (YOY)
- Asia down 30,000 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 has been staged and the price has moved above the near term downwards trend line. Volatility is high (Figure 3) indicating that the market has not yet decided on future direction.
Figure 2 At this scale, there is as yet little sign of an oil price recovery being staged. 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 is at present. High volatility is normally correlated with lows in the oil price and market indecision. See Oil Price Volatility for further explanation.
Figure 4 The US oil and gas rig count continues its steep decline with 400 oil and 102 gas rigs counted on Friday 26 Feb.
Figure 5 The near-term peak in US production was 13.24 Mbpd in April 2015. The January 2016 figure was 12.61 Mbpd, down 630,000 bpd from that peak. The decline from Dec to Jan was 170,000 bpd.
Figure 6 OPEC production has been rock steady for 12 months (dashed line) and currently stands at 31.92 Mbpd, up 270,000 bpd on December. New OPEC member Indonesia is included with Asia (Figure 14).
Figure 7 With the exception of Saudi Arabia and Iran, OPEC spare capacity is now all but zero. Iran has been slowly ramping production (Figure 9) and Iranian spare capacity is now in decline.
Figure 8 In January, Saudi production stood at 10.21 Mbpd, up 70,000 bpd on December. 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.
Figure 9 A new chart for Iran is included to show how Iranian production is now rising as spare capacity falls. In January, Iranian production stood at 2.99 Mbpd, up 80,000 bpd on December.
Figure 10 The ME OPEC oil rig count is on a rising trend with operational cycles superimposed. ME OPEC rig count was down 3 in January, while the trend remains up.
Figure 11 The international oil rig count continues its decline, down 40 in January. I suspect a large number of the rigs counted here as operational are in fact under contract but stacked by clients, who in the UK at least, have lost their appetite for drilling.
Figure 12 Russia and other FSU produced 14.05 Mbpd in January, up 10,000 bpd on December 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 13 The cycles in European production data are down to summer maintenance programs in the offshore North Sea province. To get an idea of trend it is necessary to compare production with the same month a year ago. 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. European production is up 30,000 bpd to 3.49 Mbpd compared with a year ago.
- Norway Jan 2015 = 1.95 Mbpd; Jan 2016 = 1.96 Mbpd; up 10,000 bpd YOY
- UK Jan 2015 = 0.94 Mbpd; Jan 2016 = 1.02 Mbpd; up 80,000 bpd YOY
- Other Jan 2015 = 0.60 Mbpd; Jan 2016 = 0.54 Mbpd; down 60,000 bpd YOY
Figure 14 This group of S and E Asian producers has been trending sideways since 2010. The group produced 7.73 Mbpd in January, down 30,000 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 15 N American production looks like it topped in April 2015 at 20.12 Mbpd. Group production now stands at 19.67 Mbpd down 180,000 bpd on December and down 450,000 bpd from the April 2015 peak.
Figure 16 Total liquids = crude oil + condensate + natural gas liquids + refinery gains + biofuel. January production was 96.53 Mbpd down 230,000 bpd on the revised December figure and down 550,000 bpd from the July 2015 peak.
Figure 17 Global stock changes reflect the imbalance between supply and demand. Surplus supply grew in 4Q 2015 at a rate of 1.8 mbps. The over-supply situation is likely to persist throughout 2016.
Still High Noon for the Oil Price
No one has ever been able to predict the oil price. The current situation is a balance between quite strong bull and bear signals. Last month I said:
Investors and speculators will expect the $26 lows to be tested. The fundamentals prevailing at that time will be crucial.
This duly happened and support held, but WTI has yet to break free of resistance at around $33 and direction remains undecided.
On the bear side we know that:
- The market will likely remain over-supplied throughout 2016.
- Demand in Q1 and Q2 is cyclically weak.
- Iran returning to full market will pour gasoline on the bonfire.
- There are multiple signs of a slowing global economy, despite cheap energy.
- There’s no sign yet (as of January 2016) of production falling significantly.
On the bull side we know that:
- The oil price will definitely rise from current levels unless the global finance system fails.
- Low price and low investment now, lays the ground for supply shortage in the years ahead.
- Zero spare capacity will prime the market for volatility and price spikes to come.
- The down trend in declining price tops has been broken and there are signs of price support (Figure 1).
- Shale patch bankruptcies appear to be accelerating as is the down turn in non-OPEC drilling