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A Bloodbath Looms Over Oil Markets


Oil prices have traded reliably in the $50s per barrel since OPEC agreed to cut production last November, but having failed to break through a ceiling in the upper-$50s, crude prices are in danger of falling back again.

The oil market had wind in its sails on expectations of substantial drawdowns in inventories following the pending cut of a combined 1.8 million barrels per day (1.2 mb/d from OPEC plus nearly 0.6 mb/d from non-OPEC countries). Indeed, the IEA reports that oil inventories in OECD countries have declined for five consecutive months, although they still stand above the running five-year average. Meanwhile, in the U.S. oil inventories have actually increased significantly so far in 2017.

The shockingly high compliance rate that OPEC has thus far achieved this year, one would think, should have pushed oil prices up much higher. But crude prices have barely budged since several key market watchers, including S&P Global Platts, the IEA and OPEC, put out similar numbers that show OPEC countries have achieved a roughly 80 to 90 percent compliance rate, much higher than analysts thought would be possible from the contentious group. If OPEC took 1 mb/d off the market in January, why are prices struggling to move from the low- to mid-$50s?

Of course, rising U.S. production is part of the story. The latest weekly EIA data puts U.S. output at 8.978 mb/d, a touch below 9 mb/d, which is up more than 400,000 bpd from a few months ago. In addition, the EIA’s Drilling Productivity Report estimates that production from the major shale basins will rise in March by nearly 80,000 bpd, the largest increase in five months. Nearly all of that increase is expected to come from the Permian Basin. Related: Oil Prices Head Lower In Spite Of Bullish OPEC Data

(Click to enlarge)

But on top of rising U.S. output, OPEC’s cuts are less impressive than they might seem. Output from Libya is up more than 100,000 bpd from November and up nearly 0.5 mb/d from its lowest point last year, with more gains to come. Nigeria also threatens to sabotage the OPEC deal if it restores around 0.5 mb/d of disrupted supply.

Moreover, Saudi Arabia ramped up output just ahead of the deal, blunting the impact of its cuts – it cut from a historically high levels. Also, Iran was allowed to increase production slightly, and Iraq, the other major producer in OPEC, is falling short of its pledged cuts. As for non-OPEC countries, Russia has only lowered output by 100,000 bpd compared to its promise of a 300,000 bpd reduction. At any rate, Russia cut from post-Soviet record highs as well.

In short, OPEC has indeed achieved a very high level of compliance, but the underlying math is not all it seems to be. OPEC succeeded in sparking a highly bullish mood in the oil market, but oil traders and investors are starting to catch on to the fact that there are still supply overhang problems in the market.

That creates a downside risk to prices in the very near future. Hedge funds and money managers have amassed the most bullish combined position in years, with everyone going long on oil, betting that $60 was around the corner. With prices now being met with resistance, the danger is that more traders start to bail out of those long bets, sparking a sudden correction in prices on the downside. “There’s starting to be fatigue about the range we’ve been trading in,” John Kilduff, a partner at Again Capital LLC, said in a Bloomberg interview. “It won’t be summer until we break out to the upside.”

Looking forward, everyone will watch how the same dynamics will continue to play out – bulls will watch for steady OPEC compliance and inventory declines while pessimists will keep an eye out for rising U.S. output and questionable demand from China and India. The market continues its slow and painful adjustment process, which should see more price gains at some point in the future, but the short-term looks more shaky.

“There’s a lot of complacency out there. If these bets start to unwind, it will be a bloodbath,” Doug King, chief investment officer at RCMA Asset Management, told the Wall Street Journal in an interview.

21 Comments on "A Bloodbath Looms Over Oil Markets"

  1. Boat on Wed, 15th Feb 2017 5:34 pm 

    Without the production cuts of OPEC/Russia there would be another 1 Mbpd on the market. The market went from around $43 to $53 on the rumors and then the actual cut. What one terms a success is debatable.
    The million dollar question, will OPEC/Russia give up even more market share to keep the price above $50 or resume pumping and crash the prices.

  2. Nony on Wed, 15th Feb 2017 5:44 pm 


  3. Cloggie on Wed, 15th Feb 2017 5:52 pm 

    The guy in the video, second from the right, that’s Richard Heinberg, honest:

  4. william sadler on Wed, 15th Feb 2017 8:53 pm 

    Bakken down 94Kbbl/d this month.

    Selective bias in this article.

  5. GregT on Wed, 15th Feb 2017 10:44 pm 

    I can hardly wait until The Glut™ finally works it’s way through the system. Looking forward to gasoline returning back to the 60c/litre level like it was back in ’05.

    These current high gasoline prices are wreaking havoc on peoples’ pocketbooks, and the overall economy in general.

  6. Boat on Wed, 15th Feb 2017 11:59 pm 


    If fuel is so expensive then why is most of the demand coming from poor countries like China and India. If they can afford it, why can’t the rest of the world.

  7. GregT on Thu, 16th Feb 2017 12:45 am 

    “If fuel is so expensive then why is most of the demand coming from poor countries like China and India.”

    China and India combined have a population of 2.7 billion people Boat. Together, they still demand less oil than the US, while having over 8 times the population. I doubt you’d be able to understand such complicated arithmetic, so I won’t waste my time trying to explain it to you.

  8. GregT on Thu, 16th Feb 2017 12:55 am 

    And Kevin,

    When US per capita oil consumption drops to levels ~10% of what it is today, you should be able to figure out the affordability angle, but being as dense as you are, you’ll probably blame the severe depression on something, or somebody else.

  9. Midnight Oil on Thu, 16th Feb 2017 1:01 am 

    On average, 44.4% of petroleum becomes gasoline. There really are no waste products from petroleum. The lighter chemicals are natural gas, liquified petroleum gas (LPG), jet fuel, and kerosene. The heavier products are used for the manufacture of lubricants, plastics, and asphalt. In addition, many less valuable products can be chemically converted into more saleable compounds.

    Read more:
    Today, almost all gasoline is used to fuel automobiles, with a very small percentage used to power agricultural equipment and aircraft

  10. GregT on Thu, 16th Feb 2017 1:35 am 

    “There really are no waste products from petroleum.”

    No, none whatsoever. Every single thing that we have gained from petroleum will be beneficial to the Earth and all of the species currently living on it, for at least tens of thousands of years to come. Those that survive the lack of ‘waste products’, that is.

  11. Anonymous on Thu, 16th Feb 2017 3:02 am 

    Absolutely. MO. Im not aware of any problems associated with the production or use of

    -plastics (better living through chemistry right?)
    -or lubes

    Good thing were so damn efficient at turning oil into all those wonderful by-products, or imagine how much trouble wed be in…

  12. makati1 on Thu, 16th Feb 2017 3:06 am 

    GregT, The Ps manages on 1/20th the oil that the U$ consumes. Obviously there is a long way for Americans to fall yet. lol

  13. yoananda on Thu, 16th Feb 2017 3:10 am 

    “If fuel is so expensive then why is most of the demand coming from poor countries like China and India. If they can afford it, why can’t the rest of the world.”

    Simple: because 1 barrel there add far more value to their economy than in our’s

  14. brough on Thu, 16th Feb 2017 4:00 am 

    Certainly the oil markets are behaving in peculiar manner.
    I’ve never known the price to be so stable.
    I smell a rat!!

  15. Midnight Oil on Thu, 16th Feb 2017 6:17 am 

    The “only” waste product is Heat…in the form of greenhouse gas or the actually loss in the production process…PS I just posted it to show most of gasoline is made for the automobile…which was invented to “dispose” of the “waste,” product.

  16. Revi on Thu, 16th Feb 2017 8:10 am 

    It looks like the ETP model’s prediction of around $54 a barrel this year might be correct. Next year it drops to $42, so we’ll see what they blame it on then…

  17. dave thompson on Thu, 16th Feb 2017 11:39 am 

    No waste? What about all that brine water cut? What about the radio active mud tailing of drilling? What about the excess CO2? How about all the plastic crap we dump into the oceans and land? What about the agriculture runoff of pesticides, herbicides and fertilizer?

  18. BobInget on Thu, 16th Feb 2017 12:42 pm 

    Demand is growing, not diminishing.

    Look at today for example.
    Knock oil down one percent and nervous longs bail while shorts follow on like dogs on slices of American Cheese.

    Deep pockets have been spreading rumors along lines Trump will tax imported Canadian crude imports. (so wrong and several levels)
    ‘fake news’ (CAFTA/NAFTA) cost more then 2 billion in market value for Canadians.

    Foreign investors were buying Canadian shares at a
    30% discount to USD already. (loonies near historic low vs USD’s on a so called ‘Trump Effect’)

    Canadian oils cope with an inflated dollar because crude in priced in dollars. Wages, rig rentals, loan servicing are most often based on CAN Dollars.

    So far stock markets are ignoring Washington’s
    warlike rhetoric. Attacks on Iran have been predicted for so many years any reactions long ago been muted.

    It’s possible if DT’s back is to the wall he will order another doomed to fail attack on Iran.
    Stay tuned.

  19. Plantagenet on Thu, 16th Feb 2017 2:32 pm 

    Demand is slowly growing, but not enough to end the oil glut. Either KSA and other oil producers will have to cut production even more, or we’re going to have another price collapse.


  20. GregT on Thu, 16th Feb 2017 2:52 pm 

    “Either KSA and other oil producers will have to cut production even more, or we’re going to have another price collapse.”

    Bring it on! Looking forward to $25/bbl oil again, like what we had for the better part of a century before The Oil Glut™.

  21. Boat on Thu, 16th Feb 2017 4:20 pm 

    The Permain breaks even at around $35. This is the area of US growth. If OPEC/Russia wants to regain their market share at some point they will have to drop prices by ramping up production. Trump will probably add millions of acres of drilling prospects. Time will tell if new oil fields will add to OPECS problems. I realize this is over the heads of some prepping doomers but for some of us it’s just plain o’l supply and demand. OPEC is playing a game they can’t win short term. Btw, ya’ll been tracking the US stock market? Just like almost 4 years ago there was no crash and now recent 20 percent gains. Good luck with your ingestion future.

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