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Thursday, July 14, 2016

Speculation Mounting That Oil Prices Will Drop Again

Predicting what will happen to oil prices seems to be the ultimate example of an inexact science.  A lot of very intelligent people who get paid to speculate on what will happen next have been proven wrong over and over, especially in the past two years or so.

With that in mind, take the following for what it's worth.

After seeing prices rebound quickly and go north of $50 in recent weeks, the oil price has declined again of late, landing in the $45 range over the past couple of weeks.  A variety of factors have been implicated in that drop, including Brexit and the latest rhetoric from OPEC.  And now the talk among analysts seems to be concerned with if and how much further oil may drop before the price starts to rise again.

First, from Forbes contributor Michael Lynch:
The Brexit-induced turmoil in financial markets undoubtedly affected oil prices, despite the likelihood that fundamental effects will be minimal. British economic growth and oil demand might be somewhat smaller than expected pre-Brexit, but on a global level, insignificant. The sun has long set on the British oil empire.

On the other hand, the flight from the pound to the dollar no doubt has pushed the price of oil slightly lower, although there might also have been some ‘flight to safety’ in oil, but probably nothing compared to what has been seen at times over the last decade. Political risk in the oil market remains extremely high, partly because spare capacity in OPEC is minimal, making it difficult for the producers to respond to any further outages, but also due to the potential for surprise increases in supply. 
In particular, Libya appears to be close to achieving enough stability to reopen its primary oil ports and perhaps add close to 1 mb/d in high quality crude oil to the market, although that level is unlikely to be reached quickly. The situation on the ground appears much improved, but it is unlikely that restarting exports requires little more than flipping switches. In at least some places, the security situation (or insecurity situation) means that little or no maintenance has been done, and so at the least some weeks of work will be necessary to resume operations.
Next, from Oilprice.com:
Altogether, the IEA estimates that about 95 million barrels of oil are sitting in floating storage, the highest level since a wide contango opened up in the aftermath of the financial crisis in 2008-2009, which led to oil traders stashing oil at sea. 
But the IEA said that the current floating storage predicament is different from the situation in 2009 when oil traders were hoping to store a glut of oil for a profit at a later point in time. The IEA says that the market contango does not support floating storage today – the price differential between near-term contracts, while trading at a discount to futures one year out, is not wide enough to justify storing oil at sea. Instead, oil and refined products such as gasoline and diesel are being stored on tankers because of logistical problems. In addition to the North Sea, the IEA cited a recent backup of gasoline tankers at New York harbor because onshore storage facilities were mostly already in use. 
The rising use of floating storage proves that the market is far from balanced, even if it is moving in the right direction. The IEA warned in its report that a gasoline glut could forceanother oil price rout, and the presence of floating storage also demonstrates that there is still too much oil on the global market.

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