WTI crude prices are up almost 6% this morning with April (the new front-month) trading above $33.50 - testing post-DOE plunge stops. The irony of the ramp is that it comes amid terrible global PMIs (demand), a report from IEA of oil staying in glut for longer than expected (supply), and warnings from Abu Dhabi's biggest bank that $20 oil is possible. Oh well, we are sure the algos know what they are doing... despite veterans of the 1980s oil glut warning it could take 7 to 10 years to emerge from the current slump.
Overnight saw Japanese PMI tumble, China PMI drop below 50 once again, and Europe worst in a year... so demand is not looking good.
On the supply side, as Bloomberg reports, the global oil glut will persist into 2017, limiting any chance of a price rebound in the short term as the surplus takes even longer to clear than previously estimated, according to the International Energy Agency.
While U.S. shale oil production will retreat this year and next as the price slump hits drilling, its subsequent recovery will ensure America remains the biggest source of new supply to 2021. The Organization of Petroleum Exporting Countries will expand its market share slightly this decade, with Iran, newly released from international sanctions, displacing Iraq as the organization’s biggest contributor to supply growth.
“Only in 2017 will we finally see oil supply and demand aligned but the enormous stocks being accumulated will act as a dampener on the pace of recovery in oil prices,” the Paris-based adviser to 29 countries said in its medium-term report Monday. “It is hard to see oil prices recovering significantly in the short term from the low levels prevailing.”
The IEA’s new outlook is the latest sign that oil forecasters are bracing for a “lower-for-longer” price environment. The agency acknowledged that the industry’s expectations -- and its own predictions -- that oil markets would recover in 2015 proved “very wide of the mark.” The report also signals that while OPEC will succeed in its policy of defending market share, the group will have to endure an extended period of reduced revenues.
Which has led Abbu Dhabi's biggest bank to warn of the possibility of $20 oil (as Bloomberg reports)
Oil prices may drop to near $20 a barrel this year as the global glut of crude persists into 2017, Abu Dhabi’s largest lender said.
U.S. benchmark West Texas Intermediate crude should trade in a range between $25 a barrel and $45 a barrel for the rest of the year, “although a very brief spike down towards $20 is possible,” the National Bank of Abu Dhabi PJSC wrote in its Global Investment Outlook 2016 report on Sunday. Prices at the lower end of the range will stimulate demand growth, it said.
“For at least the next few years there do appear to be solid fundamental reasons why oil prices are likely to remain in a trading range,” NBAD analysts wrote in the report. Producers have sold less of their crude this year through forward transactions than in past years, and forward-selling would likely accelerate if prices rallied much above $40 a barrel, the bank said.
So after all that... oil prices are soaring...
But now that we have run stops into the DOE ledgge... what happens next?
Well, if veterans of the 1980s oil glut are correct, as Reuters reports, the current drop in prices carries echoes of those desperate days.
Interviews with some of those involved in that period reveal that while there is little consensus on how long prices will stay depressed, experience suggests the current market glut will not evaporate soon.
By late 1986, Saudi Arabia and other OPEC members opened the taps again to regain market share, and prices did not recover for 20 years.
The memory leaves Sheikh Ali, now 71, feeling grim about a price recovery this time.
"Tomorrow if the price of oil goes down to $20 I would not be surprised,” he said. "You don't take excess oil away very quickly. It was true in the 1980s, now it's even worse."
"They realize that at a price that's too high ... U.S. shale production comes roaring back," said Morse, the global head of commodities research at Citigroup.
Sheikh Ali estimated it will take seven to 10 years to emerge from the current slump. "The idea that U.S. companies are going to collapse and therefore their production is going to zero is daydreaming," he said. "Even the wells that have closed can easily re-open."
Saudi Arabia may no longer be the swing producer of global markets, but the United States is now the world's "spring producer," Sheikh Ali said. Shale stands to put a long term damper on global markets, because when oil prices rise even a little, North Dakota and Texas output can pop back to market far easier than expensive deepwater or Alaskan production did decades ago, he said.
"I don't think it is negative for countries in the Gulf," he said. "It will make us more rational, pay more attention to our economy, reduce corruption, have better management. It may be a blessing in disguise."
So "unequivocally good", after all the lower for longer bad is over... which may take up to ten years to clear.