Last week oil prices had a decent rally, 8.7% for West Texas Index to trade above $50 for the first time since July 2015, and 9.5% jump for Brent. The rally led European oil companies to book their best weekly performance since the 2008 financial crisis as they added about $86 billion in value, and raised questions on whether the worst for oil is over.
Monday morning rally seems to most likely continue as prices were colored in green. As we got closer to Wall Street opening session heavy selling took place, dragging down both major benchmarks by more than 5%, their largest one-day selloff since Sept. 1. This move proved that the recent rally was not based on strong fundamentals, and programs to cut spending, delaying projects and reducing workforce by major oil producers still not enough to stabilize prices.
For the past one year almost everyone in the media was blaming the U.S. shale oil industry as a major factor behind the crash in Oil. That’s true, shale oil played a major role in the supply glut but when looking at latest reports from the government agency EIA, oil fields in major producing states, Texas, North Dakota, Colorado and Ohio all set to drop, bringing declines in the U.S. shale to 350,000 barrels a day since the shale boom in April. The continued pressure on the industry would bring U.S. crude production average to about 8.9 million barrels a day in 2016, down from 9.2 million barrels a day in 2015. In consistence with EIA, monthly oil-market report from OPEC sees U.S. production falling by 280,000 barrel for the first time since 2008. Baker Hughes also reported last week that U.S. oil-rig counts dropped by 9 to 605, the lowest since June 2010.
Finally OPEC won this round versus U.S. shale but why did prices crash again?
What is driving oil production right now is clearly not the U.S.; Markets continued to be flooded with Oil from OPEC and Russia with neither looking to cut back and both strategies to maintain market share. Looking into OPEC figures, KSA production at 10.2 million barrels a day, slightly down from last month, meanwhile Iraq is producing a near-record 4.14 million barrels a day, which brings OPEC production to 31.57 million barrels a day, the highest level since April 2012.
Clearly the fundamentals are not of great support with record production from non-shale industries along with slowing worldwide economy. The real risk to oil prices in the foreseeable future is running out of storage space which could lead to test price levels below 2009 lows.