If there is one thing we know about where the price for crude oil on the global market is heading, it is that nobody really ever knows where the price for crude oil on the global market is heading. Just six weeks ago, news reports about oil largely focused on 'how high can it go' as the Brent price topped $86/bbl on October 3, while the price for West Texas Intermediate (WTI) topped $76/bbl.
At that time, various banks, investment houses and analysts were lining up to see who could come closest to predicting the exact date on which the Brent price would close above $100, returning the commodity to its glory days of 2014. Officials from Saudi Arabia and Russia were engaged in discussions about how much additional production to put onto the market as the U.S. sanctions on Iran were about to be renewed.
That was then, this is now. From October 3 through 3:00 p.m. on November 13 (as I'm compiling this piece), both Brent and WTI had dropped by about $21/bbl, a loss of 24% for Brent, and 28% for WTI. November 13 marked a record 11th consecutive trading day on which the WTI price had fallen, as the price dropped by more than $4/bbl.
A variety of factors have come into play since that heady day six weeks ago to cause the price to slide, not least of which is the ongoing rapid rise in U.S. shale production. In fact, perhaps the single biggest factor for this week's precipitous slide was the estimate published last week by the U.S. Energy Information Administration (EIA) that per-day production of U.S. crude had risen week-over-week from 11.2 mmbopd to 11.6 mmbopd. Such a huge jump in a single week seems very unlikely, and these weekly estimates are often later revised, but that big number, combined with a simultaneous big jump in the active rig count, seems to have spooked the market.
Then again, the market was already a little spooked, and the ongoing speculation about a slowdown in China's huge economy, along with a resulting fourth-straight monthly downward revision in OPEC's projected demand growth for 2019 (which is a still-healthy estimated growth of 1.29 mmbopd) no doubt had impacts of their own on the market's psyche. As I pointed out last week, all of this roiling in the markets comes right at the time during which U.S. oil and gas producers are attempting to finalize their capital budgets and drilling programs for 2019, increasing uncertainty at a very inopportune time.
Here's what we know for sure: In the past 12 months, if the latest EIA numbers are to be believed, overall U.S. crude production has risen by a somewhat astonishing 2 million barrels per day, as advancing technologies and increased efficiencies enable producers to wring higher volumes out of each successive well they drill. A reasonable person a year ago might have predicted that the U.S. industry would be able to achieve half of that overall increase.
The result of all of this additional U.S. production coming into the market has been rapidly increasing pressure on OPEC and other exporting nations to adjust their volumes accordingly in order maintain the commodity price at desired levels. As Iran's ability to export has become increasingly limited since July due to the re-implementation of U.S. sanctions, both Saudi Arabia and Russia have responded by raising their own production levels to fill the "void" they believed was being created in global supply. With the benefit of hindsight, we now know this turned out to have been a misjudgment of the actual conditions of the crude market, which suddenly appears to be imbalanced with an excess of supply.
All of which helps to illustrate the original point: If Saudi Arabia and Russia don't know where the price for crude oil is headed, who really does? That explains why nobody is talking about a return to $100 oil today.
Date: Nov 14, 2018