Although the stocks report showed an unexpectedly large drop in the US crude inventory of 4.2 million barrels last week, this was offset by a surge in refining and an increase in US gasoline inventories of 800,000 barrels that sent prices lower on Wednesday. The large increase in Chinese and Saudi refining in the last couple of years and the high rate of US refining are turning a glut of crude into a glut of refined products and is not changing the overall supply/demand balance. The London futures market hit a six-month low of $49.02 on Wednesday and closed at $49.59. US futures closed at $45.15 the lowest since last March.
A wave of pessimism is engulfing the oil industry as prices show no signs of rebounding from multi-month lows. The second steep drop in oil prices is dimming hopes that a price rebound will happen soon. While spot oil prices are still about $4 a barrel higher than they were last winter, prices for futures contracts delivering in 2020 are now about $8 lower than they were in January, suggesting that traders do not see an imminent price rebound. Despite some $200 billion in capital spending cuts in the last year, oil companies are still losing money and will have to implement still more spending cuts and sell off assets.
OPEC’s hopes that their low-cost oil would quickly drive the high-cost US shale oil producers out of business do not seem to be coming to fruition as US production is thought to have fallen by only a small amount since the price declines began. This is mainly due to large backlogs of drilled but not yet fracked wells in Texas and North Dakota and the willingness of US investors to continue financing unprofitable drilling operations in hopes of a price rebound.
The EIA now says that US oil production peaked in March, and only fell slightly in April and May despite the large drop in active drilling rigs. The latest estimate in the weekly stocks report has US output climbing by 52,000 b/d last week. These weekly estimates, however, are largely based on models which are less reliable in the current volatile oil market situation.
Baghdad reported that its “official exports” slipped slightly in July despite an increase in its exports from the southern oil fields through Basra and beastly hot temperatures that had the capital shutting down for four days last week. The Kurds say they exported nearly 500,000 b/d through Turkey last month despite a four- day pipeline outage in Turkey due to sabotage. Much of this output was marketed independently from Baghdad’s State Oil Marketing Organization. The Kurds have started to divert some money to pay the foreign oil companies that have been doing their oil drilling. These companies have been complaining for months about the lack of payment for their efforts as Baghdad helps back a large portion of the monthly payment that was due Kurdistan.
The Saudi’s announced plans to issue $27 billion in bonds before the end of the year. This is the best indicator yet that $50 oil is hurting the Saudis’ financing. Some are already talking about additional bond issues next year.
New data shows that China’s economy stalled in July with little or no growth in manufacturing. The continuing disarray in China’s equity markets continues with the government spending billions to prop up stock prices.
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