Looking at the crude oil markets around the world, we notice they are leaning back to the middle $40s, once again! This time of year we usually see the highest prices of the year, because we are approaching the peak of the drive season. So, what’s up? News stories from around the globe want us to believe the problems in the market are the fault of the US shale producer, or they blame the US president for destabilizing the markets. One thing is for sure, the numbers don’t jive with the story being floated about by most media outlets.
I’ve not read one single article that addressed the explosion of production by Organization of the Petroleum Exporting Countries (OPEC) members. Media outlets haven’t addressed the increase, which provided a cushion for their cuts before the end of last year. I haven’t read an article that adequately addressed the OPEC crude oil cuts as it compared to the US crude oil production increases either. What we’ve read is how OPEC’s efforts to balance the crude oil market are being thwarted by overproduction from the US shale producer. So, as we always do, we decided to run the numbers and see if US production increases are really enough to offset OPEC’s production cuts and force prices down.
US Crude oil Production vs. OPEC Production Cuts
Let’s start by looking at the US crude oil production levels. In September of 2016, the US produced 8.58 million barrels per day. By January of this year, the US produced 8.35 million barrels per day, and as of May 15, 2017, the US produced 9.305 million barrels per day. OPEC on the other hand has decreased production from 35.06 million barrels per day in September of 2016 to 34.63 million barrels in January and continued to decrease its production to 31.714 million barrels by May 15, 2017. (See chart below)
I could stop right here, because it’s plain to see the difference between the OPEC cuts and US production increases is significant, but not in the way the media portrays. What we’re seeing is the OPEC decreases far outweigh US production increases. This chart shows US crude oil production would have to increase five times more than it has already to meet the cuts by OPEC. As a matter of fact, we in the US are within only 300,000 barrels per day of reaching record production of 9.637 million barrels per day from back in 1970. With that kind of technical topping action, it would be very difficult for the US to blast into record territory without some serious momentum, but not impossible. But, that’s still not enough to make a difference.
If the US shale producer isn’t to blame, as proven above, what is forcing prices down? Is it slowing US and world demand? Is it the fact that supplies are still too high? Or is there another contributor at play here, like the threat of a religious war between the cartel members? It’s quite possible that the entire set of metrics is working in concert to keep pressure on prices.
US crude oil production continues to rise as WTI continues to trade around $47 on the West Texas Intermediate (WTI) crude oil, but the increase in US production isn’t as dramatic as is portrayed in most reports. As a matter of fact, it appears the 2017 rally in production is slowing. (See chart below)
Looking at the chart above, it appears the slope of the curve is flattening as production begins to mirror the US economy. In other words, as the US economy continues to crawl just below a 2% growth rate, production of crude oil may be stabilizing, and beginning to follow a path that more closely resembles US demand; low and slow growth. But that alone isn’t enough to pull prices down. In most circles, slowing production growth helps to stabilize prices, unless slowing demand pulls it back. While that may be part of the culprit here, there is another scenario we need to explore.
The Straw That Broke the Camel’s Back
On May 25, you might remember that OPEC agreed to extend, but not deepen their crude oil production cuts. The news disappointed the markets and prices fell. However, that news by itself wasn’t enough to drag prices back until it collided with the news from this weekend that is shaking the crude oil export world. On June 4, the Saudis, the UAE, Bahrain and Egypt cut economic ties with Qatar because of their growing interest and work with Iran. This news has threatened to shake apart the recently extended OPEC production cut deal. It now appears opposing Muslim factions are now drawing a line in the sand that is threatening the stability of not only OPEC, but also world crude oil prices.
Now, let’s make the picture a bit clearer. Below is a rather crude chart showing the metrics we discussed in this article and the individual effect they have on crude oil prices. For context, what we’ve been reading lately in the news are snippets of these to support an author’s overall theme; but when you put these metrics together, you get the net-effect, and they begin to give us a much different picture.
In conclusion, we proved the US production increases are not enough to offset the production cuts from OPEC. Second, we see US production increases are slowing, but haven’t stopped and they are beginning to follow the pace of the US economy. Third, we found the cuts were just increased but not deepened enough to help support prices. Lastly, we have some religious factions within OPEC cutting ties with Qatar. This caused a ripple across the entire crude producing and consuming world that threatens to tear apart the OPEC production cuts. I hate to be trite, but it fits here, “This is the straw that broke the camel’s back.” World oil markets don’t like the threat of this rift deepening, and when added to the other pressures in the crude oil market, prices are now on shaky ground!
By Tim Snyder
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If you want more information on the energy markets and what is making prices move every day, go to our website www.crudefunders.com and scroll down to where it says “Subscribe”. There you will find our link to the daily commentary “Energy Wise”, a comprehensive piece that includes both fundamental and technical analysis of the day’s energy markets and provides you with the detail that you need. For more on Energy Economist Tim Snyder and his company, go to www.matadoreconomics.com.