Peak Oil Notes – May 7

Oil prices surged to 2015 highs on Wednesday after the EIA reported that US crude stocks fell by 3.9 million barrels last week, the first decline since late December.  The drop in stocks sent a signal to traders that the oil glut may be easing, sending NY futures up $2 to $62.58 and London up to $69.63 before settling to close at $60.93 in New York and $67.70 in London on profit taking.  In their enthusiasm to buy oil futures, traders failed to note that US crude imports were unusually low last week — down by 6.3 million barrels from the week before last and 4.9 million below the 4-week moving average. Analysts say imports are likely to rebound in the next report suggesting that increasing stockpiles in the US may have a way to go.
 
Although the sharp increase in prices in the last two months has led the major financial institutions to back off their lower price forecasts, such as the $30-40 a barrel they were predicting last winter, many believe that oil market fundamentals still are unusually weak and that we are witnessing a speculative price bubble. Domestic oil production dropped by only an estimated 4,000 b/d last week, despite the precipitous decline in the rig count, and US inventories are at near record levels. Total US commercial petroleum inventories increased by 6.6 million barrels last week.
 
Of more importance to the future course of oil prices is the gap between the futures and spot markets, with spot traders seeing evidence that much crude is not being sold, and the IEA saying there is still a daily surplus of 1.5 million barrels.  Some analysts say the fundamentals continue to look dire with weak demand from weak economies in Europe, China, and the US.  There are, of course, many possible developments in the Middle East that could push prices higher such as failure of the Iranian nuclear talks or significant gains by ISIL in Iraq.  Some believe that the reduction of capital spending and layoffs in the oil industry has come so swiftly that production will drop sooner than expected and prices will go higher.  In general, the preponderance of observers seems to believe that fundamentals point to lower prices in the next few months.
 
With the recent increase in prices, OPEC is likely to maintain its present policies at its June meeting. In Libya, the closure of a major oil port this week by protesters demanding more jobs and the continuing shutdown of the El Feel oil field have cut Libyan production to 400,000 b/d with only about 200,000 b/d being exported. However, as we have seen in the last few years, these protest shutdowns are usually short-lived and production bounces back relatively quickly.
 
Iraqi oil exports continue to climb, hitting 3.07 million b/d in April, up 3 percent from March. The Pentagon is said to be worried about Iraq’s largest oil refinery at Beiji, which was partly overrun by ISIL last week despite considerable US air support for its embattled government garrison. Loss of this refinery would be a major setback for Baghdad, as would the collapse of the Assad government in Syria.
 
US natural gas futures trended lower this week as mild weather, which calls for neither heating nor air-conditioning, prevailed across much of the US.