Bullish Sheen on Oil Markets Wears off

Large Downside Risk as Oil Outages Come Back Online.

By Nick Cunningham, Oilprice.com

A month ago, fires raged in Alberta, militants attacked oil fields in the Niger Delta, U.S. shale production was plummeting – and oil prices were capping off a spectacular rally, rising more than 80 percent in three months.

But by the end of June and early July, the bullish sheen on the oil markets is wearing off.

In May, Canadian oil producers had to shutter facilities and evacuate workers. The entire city of Fort McMurray was abandoned for weeks. Canada saw production plunge by more than 1 million barrels per day (mb/d), taking huge volumes off of the global market.

Nigeria also contributed to the market tightening. The Niger Delta Avengers were on a rampage a few weeks ago, successfully pulling off attack after attack, blowing up pipelines, platforms, and oil wells. The companies they targeted were household names – Chevron, Shell, Eni. The Niger Delta Avengers threatened to take Nigeria’s oil production to “zero.” The situation was so bad that oil companies had no clue when and if they could get personnel in to repair their damaged infrastructure. The potent and shockingly successful attacks from the Niger Delta Avengers quickly caused Nigeria’s oil production to plunge from 2.2 mb/d down to somewhere between 1.1 and 1.4 mb/d, the lowest level in nearly three decades.

The two massive outages in Nigeria and Canada essentially tipped the global oil market from a supply surplus of about 1.3 mb/d into a deficit. More losses could be found around the world: The U.S. saw output fall to about 8.7 mb/d, down more than 900,000 barrels per day from a peak 14 months earlier; smaller losses are taking place in Venezuela, Mexico, Colombia, and more. In short, global supply outages hit a five-year peak in early June.

But some of those outages were only temporary, and a few weeks on from these surprising disruptions, output is starting to come back online. Canada may have lost more than 1 mb/d as oil sands producers fled wildfires, but the fires were never going to keep production offline permanently. It will take years for Fort McMurray to recover, but Canada’s oil companies are already getting back to work.

The U.S. has also seen its contraction slow. The oil industry added almost two dozen rigs in early June, halting a year-long slide. A few companies are starting to drill again, raising the prospect of new production.

The developments in the Niger Delta are even more surprising. The Niger Delta Avengers and the Nigerian government recently agreed to a temporary ceasefire. The period of calm has allowed for companies to make repairs and bring production back. Nigeria’s oil minister Emmanuel Ibe Kachikwu told Bloomberg on June 27 that the country’s oil output has climbed from 1.4 mb/d to 1.9 mb/d in June. He hopes that further gains can be achieved in July, hopefully bringing production back up to 2.2 mb/d, pending pipeline repairs.

This is great for Nigeria, but bad for oil producers elsewhere. Goldman Sachs now says that the ceasefire could contribute to oil prices falling below $50 per barrel in the second half of this year if Nigeria is able to bring all of its production back. There are more questions than answers coming out of Nigeria, making any prediction difficult. But Goldman Sachs says that it “cautiously” expects about 350,000 barrels per day in Nigeria to remain offline, outages that could conceivably balloon to 1.1 mb/d if attacks from the Avengers resume. On balance, the bank is projecting $50 oil this year, but the ceasefire could cause prices to surprise on the downside. “The path of future Nigerian production remains uncertain in the absence of a sustainable agreement,” Goldman Sachs wrote in a recent report.

The slightly pessimistic outlook for oil prices comes from more places than just Goldman Sachs. Oil futures are showing a widening contango at the end of June, an indication that the markets expect a larger near-term surplus than in previous weeks. Speculators increased net-long positions for the week ending on June 21, but only for the first time in five weeks. “Short-term supply conditions look overwhelmingly bearish,” Georgi Slavov, global head of energy, iron ore and shipping research at Marex Spectron, wrote in a report this week.

Although there are a handful of wild predictions out there, such as this prediction calling for oil to plunge to $10 to $20 per barrel this year, most analysts see little change ahead. A collection of 118 energy analysts surveyed by Bloomberg found that 62 percent of them expected WTI to end the year at $50 per barrel, largely unchanged from today’s levels. Not incredibly bearish, but certainly not bullish either. Only 23 percent of them see oil prices above $55 per barrel this year.

Oil prices may have rallied 80 percent from their February lows, but most analysts don’t see the rally continuing. By Nick Cunningham, Oilprice.com

Against a grim backdrop, Alaska has one large Ace left in the hole. Read…  End in Sight for Alaska’s Oil-Based Economy?

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  13 comments for “Bullish Sheen on Oil Markets Wears off

  1. Captain KurtZ says:

    Still think this market is badly manipulated, with the buying of gasoline futures, just like the VIX getting pounded down by the PPT to keep the index funds in line.

    Too many players (read banks with huge cracker exposure) need oil at $50.

    When the Chinese strategic oil reserves finally fill up, then we could see a crash as Point of Sale for cash deals will go down….

    Oil could be cheaper than water….

    Ultimately this is a demand question, and in a deflationary environment this bad,…..

    …..only war on world wide scale will create enough destruction and demand to meet the over-production.

  2. The problem w/ fuel is not on the extraction side but on the consumption side.

    Thousands of articles, billions of words: what is done with the oil in hand is never discussed. This is too bad because the oil is 100% wasted with nothing permanent coming of it. The oil that took 100 million years to form — ‘Poof!’ gone in an instant, for some (worthless) personal gratification.

    What pays for the waste is loans. Hundreds of trillion$ of dollars worth of loans. Loans that cannot be repaid except by taking on hundreds of trillion$ (quadrillions?) more loans. Meanwhile, our resource base is stripped more ‘efficiently’.

    Call it progress but the real name is suicide.

  3. There appears to be only two, possibly overlapping, explications of the petroleum market instability:

    (1) The market is rigged and is being highly manipulated, possibly in some sort of economic warfare against petroleum suppliers such as Iran and Russia; and/or

    (2) The “market” no longer works in this new socioeconomic epoch of globalization and supranational corporations

  4. EVENT HORIZON says:

    UH, why is there more oil in “reserves” than ever before?

    I don’t know the exact numbers (cause it makes no difference to my observations), but don’t we go through 20 MILLION barrels a DAY of oil?

    Think about this. Really. Stop reading and think………………….

    20 MILLION Barrels PER day. Where did all this come from? From dinosaur bones? Trees in the Carboniferous Era? Really? 20 MILLION barrels a day and we humans have been using this stuff for OVER 100 years? Is this really possible? Per Day. How can these “oil fields” hold all this? How can we remove 20 Million Barrels a day, every day, and there is still MORE of it?

    Something is very, very wrong with this picture.

    Why is oil found all over the world? How can there be oil MILES under the sea floor? How did Dinosaurs and Trees end up UNDER the sea floor? To convert trees/ dinosaur bones into liquid hydro-carbon chains you need EXTREME pressure and heat (says the theory). So, ask yourself, how did these trees get UNDER the sea floor at 2 or 3 miles? The continental plates are where Trees grew. The sea floor never was above water so how did trees grow on the sea floor….or even 2 to 3 miles UNDER the sea floor.

    Something is wrong.

    The deeper the well, the “cleaner”the oil. Light oil. No contaminants. The more shallow the oil well (Venezuela) the more sulfur and thick it is? Why? Why does oil have NO cellular matter from “dinosaurs” or trees? Coal does, but coal is 500 feet down, or less. Coal is compressed trees. It isn’t oil. There is nothing in light crude oil that even suggests anything to do with Dinosaur guts or Trees.

    We make a huge mistake thinking that coal and oil have any relationship to each other.

    • Mark George says:

      It is called Fischer Tropsch synthesis combine CO and CO2 wit hydrogen in the presence of iron at extreme pressure and temperature like in the earth’s mantle and you get complex hydrocarbons. This is an old Russian, then Soviet Union, hypothesis of why the earth’s crust has so much oil and gas. The theory that oil is from fossil fuels is like the theory of anthropogenic global warming very weak…

    • Thomas Malthus says:

      Closer to 98 million barrels per day


    • night-train says:

      Seriously dude. I could answer all your questions, but then I would have to send you a bill. It would be cheaper for you to enroll at the local Jr. college for an earth science course. Or, I could send my old Petroleum Geology notes to Wolf and he could forward them to you.

      Or, is this a joke? If it is, then, well played. If it is intended to be serious, I am afraid that you don’t have even a rudimentary grasp of geologic processes. And the assumptions you put forth and question, are almost entirely erroneous. And the thing about oil being old dinosaurs was from a tv commercial. Most oil results from single cell marine organisms, or what is typically referred to as algal and amorphous kerogen.

    • Nicko says:

      Can’t tell if you’re serious, but I suggest taking a grade 10 geography class, and possibly a physics class as well. Start at plate tectonics; ;)

  5. Thomas Malthus says:

    ExxonMobil and its partner Hess Corp. have announced that the major discovery off the coast of Guyana, is a discovery that is much larger than previously expected.

    The Liza field could turn out to be the largest oil discovery reported in two years and the companies say that it could cost $18 billion to develop. Exxon describes it as a “world-class discovery with a recoverable resource of between 800 million and 1.4 billion oil-equivalent barrels.” That could amount to as much as half of the entire volume of oil discovered across the entire industry in 2015.

    “We are excited by the results of a production test of the Liza-2 well, which confirms the presence of high-quality oil from the same high-porosity sandstone reservoirs that we saw in the Liza-1 well completed in 2015,” Steve Greenlee, president of Exxon Mobil Exploration Company, said in a statement. “We, along with our co-venturers, look forward to continuing a strong partnership with the government of Guyana to further evaluate the commercial potential for this exciting prospect.”


    Let’s put this in perspective:

    How many barrels of oil are produced and consumed a day?

    For 2016, the IEA Oil Market Report forecasts worldwide average demand of nearly 96 million barrels of oil and liquid fuels per day – that works out to more than 35 billion barrels a year. Production breached 97 million barrels per day (mb/d) in late 2015, and Medium-Term Oil Market Report 2016 foresees demand crossing the 100 mb/d threshold towards the end of its five-year outlook period. https://www.iea.org/aboutus/faqs/oil/

    We are sooooooo screwed….

  6. Merlin says:

    My crystal ball shows oil in the $40-60 range for years to come. The buyers of assets from distressed/BK companies are not loaded down with debt, have funds ready to go to start drilling, oil field services costs are now halved (at least), so these firms can be profitable at lower commodity prices.

Comments are closed.