Crude oil prices slipped this week as West Texas Intermediate for August delivery declined $0.14 to $44.10 per barrel – the international Brent Crude is down 0.1% to $46.63 per barrel. In June, both Brent and WTI have declined by 6.7% and 8.4% in their trading prices.
There have been the occasional glimmers of hope that could have triggered an increase in oil prices. For instance, news that Russian oil producer PAO Rosneft was hit in a cyberattack caused an upward blip in oil prices. News of tropical storm Cindy, which last week caused 16% of U.S. oil production in the Gulf of Mexico to be shut down also triggered a price bump for oil.
However, the underlying factors that kept crude oil depressed are still very much in place. This post examines the obvious bull in the China shop with two reasons crude oil prices will remain depressed until there’s a definite change in the status quo.
Saudi’s oil exports betray OPEC’s deal
One of the biggest factors that support the continued weakness in crude oil prices is that OPEC seems to be paying lip service to the need to reduce oil output. Saudi Arabia is OPEC’s de facto leader and top exporter of crude oil; hence, any action taken by the kingdom can have a significant effect on oil markets. In April, news broke that Saudi Arabia made a significant reduction in its oil exports and we saw a commensurate decline in U.S. crude imports in June.
Last week, we observed that OPEC needs to deepen the cuts to show that it is serious about ending the supply glut because the current cuts hasn’t had a material effect on ending the glut. However, tanker-tracking data from June from ClipperData shows that Saudi Arabia and other producers have started loading up tankers with crude oil for export once again. Matt Smith, director of commodity research at ClipperData observes that “that’s been the trend of OPEC loadings all year: move to compliance and move out of it from an export perspective.”
Interestingly, it appears that the most of those crude oil tankers are headed for Asia. The fact that most of those tankers are not coming to the U.S. suggests that there’ll be less data to drive market sentiment into a bearish frenzy on oil.
U.S. shale oil continues to boom
The second factor that attests to the possibility that oil prices will continue to be depressed in the short term is that the U.S. shale oil industry seems to be booming even will low prices. When U.S. shale oil started threatening OPEC’s monopoly, OPEC made a decision that is still backfiring until this day. OPEC decided that it would be impractical for U.S. shale producers to continue pumping oil if it sold at less than $50 per barrel.
Baker Hughes reports that the number of U.S. Shale oil rigs has increased 130% from May 2016. The oil services firm also reports that the number of rigs deployed in the US rose for a 23rd consecutive week last week to mark the longest stretch of continued growth in U.S. shale oil in the last 30 years.
Interestingly, recent data suggests that U.S. shale oil continues to thrive under $50 per barrel and “break-even wellhead costs in key US shale oil basins now average between $US35-50 per barrel” according to Vivek Dhar, energy analyst at Commonwealth Bank. In essence, oil price will need to drop below $35 per barrel for OPEC to succeed in its plan to edge U.S. shale oil producers out of the market.