Just as we were getting all warm and fuzzy, settling down to write about the awesome week which saw oil prices hold at above $50pb for the first time in about seven months, it goes and drops nearly 3%.
Alright now, don’t get too despondent – remember these things fluctuate faster than toddlers’ moods. It had been a remarkable change in affairs when you consider in January and February oil hit historic lows – crude tanked to nearly $25pb – a shock last felt back in 2003.
Commentators were, if not euphoric, quietly pleased. “The recovery is, on balance, good news for the global economy and for equity prices,” says Capital Economics’ chief global economist Julian Jessop. “Prices in the $50-$60 range would be high enough to ease some of the pressure on producers…” But not all. As Chad Holliday, Shell’s chairman, reminded investors at a meeting in London, 42 oil and gas companies filed for bankruptcy in the US last year. It is, he said, “a very demanding time for our industry.”
For now, let’s look on the bright side. The welcome shift basically came down to the fact that the market seemed aware that increasing output wasn’t the wisest move, and while none of the members who gathered in Vienna a couple of weeks ago agreed to a cut in production, it was happening all of its own accord. Wild fires in Canada played a part as the Niger Delta Avengers, a group of militants of whom we have spoken before, who promised to reduce production to zero, following three fresh attacks on oil infrastructure. That’s not forgetting the reassuring words from Saudi Arabia that it would not increase production despite Iran turning down a bid to agree self-imposed production caps.
It didn’t matter that OPEC said no agreement had been reached; that same day US data was released which showed production had dropped. The markets thought a rebalance was on its way. Prices surged. “It’s very clear that OPEC is less relevant than U.S. production data,” said Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC. “We’re going to trade near $50, plus or minus five bucks, for quite a while.” But he told Bloomberg he believes higher prices are inevitable.
And then this. An upswing in the number of active drilling rigs in the US. Baker Hughes reported 9 new rigs. This is only the second rise this year. Take the Permian Basin, America’s ‘sleeping giant’. It’s been reported that operators added five rigs during the week. According to oilprice.com, “Those with a presence in the basin are upbeat about the future and those without are trying to step into it in order to share in the riches.” One such person is Joey Hall, VP at Pioneer. He announced a $1.8bn investment in operations there, having revised growth projections to 12%. Others like Occidental Petroleum is also investing – up as much as 6% – but it is wisely hedging bets by focusing on reducing production costs in the event prices slide once more.
And slide they did – albeit just a little one. Brent fell to $50.88 down from $52.86. WTI dropped to $49.74. It’s important to remember as CNBC.com says last year there were 635 online rigs. Today there are around 328.
The important thing is, demand is strong. ANZ says, “Despite falling slightly, the outlook for oil remains positive which should keep the recent upward trend intact. “ Thomson Reuters Eikon has published data that shows currently available global refining activity will reach 101.8mbd, the highest on record which means producers will be able to pump every barrel they can to meet demand. The supply disruptions will tighten the market and eat into inventories.
Just when we thought we had turned onto easy street. But chins up folks. Some wise words came at the right time from CMC Markets chief Market analyst Michael Hewson: “While we’re above $50 a barrel, momentum still remains fairly positive and what we’ve just seen today is a little bit of profit taking after three consecutive days of gains.” A little perspective is a good thing! After what we’ve come through we need to appreciate where we are now and keep the heads down and spirits up.