Oil rally dampened by profit taking, but new sense of stability is welcome relief

Brent crude peaked at a 10- month high mid week and fell back despite a drop in US stockpiles.

oil well sunset by a lake
Brent crude was still priced above US$51 on Friday

The upward trend in the oil price took a slight hit this week as traders took profits and the dollar found new strength.

Brent crude peaked at a 10- month high mid week and fell back despite a drop in US stockpiles.

In early trading on Friday, Brent crude was priced above US$51 with WTI below US$50 a barrel. 

Market beginning to react to tightening of supplies

Last week, American government data showed a drop in stockpiles by 3.23 million barrels to 532.5 million barrels in total.

This is the third week we’ve seen a decline.

American oil production has pulled back and some OPEC members are suffering outages caused by geopolitical tensions and unrest.

Nigeria has suffered in recent weeks as militants continue attacks on pipelines around the country.

The fallout from the Canadian wildfires has disrupted supplies by about 400,000 barrels a day after losing more than a million barrels a day in May.

Domestic production in the US will always be important to the economy, but Jason Schenker, president of Prestige Economics says the change is evident.

“Despite the increase in WTI crude prices by 13.8 percent from April 2016 to May 2016, the Texas Railroad Commission reported that oil and gas permits fell by 11.3 percent in May 2016 to 606 from 683 in April 2016.”

Doubt expensive shale players will return at US$50

Many analysts are still doubtful that the shale players will return at prices over US$50 a barrel as financing is just not available.

Schenker adds. “the cost of capital that companies will pay for accessing alternative sources of capital will be much higher.

It could be as large a difference as around 5 percent for loans or bonds before the collapse of oil prices, to as much as 25 percent now.”

For many companies, taking on such high debt is not an option. 

A report from McKinsey this week attempted to analyze some of the oil markets complicated trends with Scott Nyquist saying, “at US $50 a barrel, there is more breathing room, but companies with weak balance sheets remain vulnerable, and a number have missed payments, filed for bankruptcy, or publicly warned of bankruptcy.”

While the new found strength of the dollar may be impacting the oil price, the demand on the refining side and the recent disruption of supply is adding a sense of balance to the market.

Refining activity is thriving

Refining activity is thriving, at its highest level on records with current available global refining capacity above 101 million barrels a day, according to Thomson Reuters Eikon report and utilization levels above 90 million barrels a day.

The March refining capacity was 97.25 million barrels a day.

The general feeling among traders and analysts is that every barrel of oil pumped right now is finding a welcoming refinery to offload and meet product demand.

The health of the global economy will help spur oil demand growth and with a sluggish global picture, key players remain cautious.

BP says demand is significantly slower

BP released its 65th edition of the BP Statistical Review of World Energy this week and it stated, “that in 2015 global demand for primary energy grew by only 1 percent, significantly slower than the 10-year average.” 

The report went on to say, “this reflected continued weakness in the global economy and lower growth in Chinese energy consumption as the country shifts from an industrial to a service-driven economy.”

Noting the changes in the global energy landscape, CEO Bob Dudley said, “our task as an industry is to take the steps necessary to ensure our resilience in the near term, while continuing to invest to meet the energy needs of the future.” 

The good news from 2015 was that “oil remained the world’s leading fuel, accounting for 32.9 percent of global energy consumption, and gaining market share for the first time since 1999.” The full report is available on the BP website.

China, India and ASEAN seen a key drivers for gas demand

The International Energy Agency released its 2016 Medium-Term Gas Market Report this week and said that the demand for gas is in the process of reshaping as more gas comes to market, “China, India and ASEAN countries will emerge as key buyers.”

The executive director of the IEA Fatih Birol says, “we see massive quantities of LNG exports coming on line while, despite lower gas prices, demand continues to soften in traditional markets.” Birol added “these contradictory trends will both impact trade and keep spot gas prices under pressure.”

Like the oil market, gas is also facing cutbacks in investment and efficiency drives.

Changing outlooks for crude

The sense of rebalance on the oil market is causing major investment banks to re-assess their outlooks and Energy Aspects from Nomura Holdings is now looking at a return to US$70 by December and for next year.

Wherever the price goes, producers will welcome the sense of stability and stronger sentiment that's coming back to the market as we begin the second half of the year. 

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