Just when fossil producers had begun taking comfort in slowly-rising oil prices, analysts are predicting a new round of oversupply that could bring the market back as low as US$30 per barrel, driven by increased production from Canada’s tar sands/oil sands and an end to hostilities that had slowed oil exports from Nigeria.
The difference matters, because installations that are barely profitable at $50 per barrel—including fracking operations in the United States and some types of tar sands/oil sands production in Canada—can’t break even at lower prices.
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“Canadian output returning from outages caused by wildfires will be enough to put the market back into oversupply and oil may return to a trading range of $30 to $50 a barrel, according to Morgan Stanley,” Bloomberg reports this week, in a story picked up by the Calgary Herald. “Goldman Sachs Group Inc. said a recovery in Nigerian production is a risk to its $50-a-barrel forecast for the second half of 2016.”
With oil selling in the $50 range over the last several weeks, U.S. shale drillers have been reopening shuttered wells and talking about expanding their activities through the end of the year. But “the market tightened much quicker than expected and the supply disruptions in places like Nigeria have gone a long way to helping that,” said Sydney, Australia-based commodity strategist Daniel Hynes told Bloomberg.
In London, Reuters reported that oil prices had dropped slightly, mainly because demand in Asia appeared to be slowing. “Asia refiners have already started to pull back,” Morgan Stanley reported yesterday, “and there are reports of cargoes struggling to sell.”
In Libya, meanwhile, there’s word that an entente among competing national oil corporations could increase the country’s output beyond its current 1.6 million barrels per day. “If the deal materializes it will have a real and considerable impact on the oil market balance for 2017,” said SEB Markets chief analyst Bjarne Schieldrop.
But a bigger threat to rising oil prices could be reflected in a Bloomberg Gadfly analysis of data on U.S. gasoline and oil demand, published by the Energy Information Administration (EIA). The preliminary numbers in the EIA’s weekly updates appear to show major increases in consumption. But its monthly reports, which are two months out of date but more accurate in retrospect, tell a different story.
“When taking the weekly figures, it looks like U.S. gasoline demand is soaring. According to those data, it’s been on a steady upward path all year, reaching a record high of 9.8 million barrels in the week ending June 17, with the summer driving season barely started,” writes Bloomberg’s Julian Lee.
By contrast, the monthly data “show U.S. gasoline consumption falling between March and April and imply a downward revision of April demand of 260,000 barrels a day, or 2.7%, from the preliminary figures,” Lee notes. “That might not seem a lot. But when the same agency forecasts that U.S. gasoline demand will grow overall this year by just 170,000 barrels a day, it’s enough to change the whole outlook for one of the few countries where demand is robust.”
And “the problem isn’t confined to gasoline,” he adds: While the weekly reports show oil demand above 20 million barrels per day and rising, the monthly figures are 800,000 barrels per day lower. The figures add a measure of doubt to projections that oil consumption will continue to grow, pulling prices higher as they go.
