Crude Oil
Oil production levels are finally starting to decline after months of depressed prices. New data from North Dakota shows that the state’s oil output fell in January to 1.19 million barrels per day, a 3.3% decline from an all-time high the month earlier. The drop off occurred because companies significantly reduced the number of wells completed – well completions dropped from 183 in December down to just 47 in January. Rigs are also down to just 111 for the Bakken, below the estimated 115-130 needed just to keep production flat. Nationwide, a decline in oil output may not be here just yet, but in the Bakken it has already begun.
But North Dakota’s contraction has not been enough to affect oil prices, which reversed the gains from recent weeks and headed back towards the lows for the year. At the close of the week, WTI traded near $46 per barrel and Brent is back down to $56 per barrel. Speculation that storage capacity is filling up is renewing worries of a supply glut. To make matters worse, the IEA raised its forecast for U.S. oil production this year, having been surprised that the precipitous fall in the number of active rigs has not yet cut into production. “Stocks may soon test storage capacity limits,” the IEA said in its monthly report. “That would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive.”
Low oil prices are terrible for producers, but for consumer nations depressed prices present new opportunities. China and India are expected to stockpile more oil for their strategic petroleum reserves this year. China had already stepped up imports in 2014 as prices declined, revealing in November for the first time data on its stockpiles. China has about 91 million barrels stashed away, and with new storage capacity reaching completion, the IEA projects its purchases will remain elevated this year. India, on the other hand, is new to the game. But the low price environment will allow the country to begin stashing away oil for the first time, with stockpiles expected to reach 6.5 to 7 million barrels this year. More construction underway will provide India with the capacity to store 28 million barrels by the end of 2015
Pressure Building On Crude Prices
May Crude Oil futures were under pressure most of the week driven by concerns over huge supply and diminishing demand. The U.S. Energy Information Administration’s supply and demand report for the week-ended March 6 showed that crude supplies rose for the ninth straight week. The bright spots in the report were that the 4.5 million barrel increase met pre-report estimates and was also much lower than the previous week’s 10.3 million barrel build. It’s too early to tell if the number of barrels is trending lower. One week does not make a trend so next Wednesday’s report is going to carry more weight than usual.
A drop in the number of barrels will also be a sign that the decline in the number of producing rigs may be working. This is the key fundamental factor that is holding this market in a range.
Despite straddling a key retracement area at $50.80 to $49.55, a downside bias seems to be developing. The lower top at $54.00 on March 5 and the lower-low on March 11 at $49.17 are signs that the downtrend may be re-emerging. Since the market may be in the hands of weak short sellers who showed up late to the game, buyers have been able to prevent a “wash-out” to the downside.
There are two major concerns weighing on prices at this time. The first is concern that storage is at or near capacity at the Cushing, Oklahoma hub. Based on the current build rate, supply is getting very close to challenging this limit. The second worry is that demand for crude may drop when refineries begin their normal seasonal maintenance.
Given these fundamentals, it looks as if crude oil will be under pressure over the near-term unless there is a drastic change in supply. The refinery slowdown caused by maintenance could last into early April.
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