Oil plummets as U.S. reserves hit stunning high,
Stockpile now at highest level in 80 years with 482M barrels
Crude prices tumbled again Wednesday after a new report showed U.S. oil inventories keep piling up, and now stand at their highest levels in eight decades.
Stockpiles increased by 10.9 million barrels for the week ending April 3, far exceeding analysts’ expectations of 3.4 million, according to a weekly update by the U.S. Energy Information Administration.
“It was another big increase,” said Colin Cieszynski, chief market strategist for CMC Markets in Toronto, noting the resulting price volatility could be here for some time.
“This is something that literally plays out over years,” he said. “Usually, when we have had these price shocks in crude oil, they don’t go away immediately.
“The shortest ones I have seen have been two years, and they can run to five to 10 years,” Cieszynski said.
The U.S. has been locked in a price war with OPEC over the oil cartel’s decision to maintain supply despite weakening global demand. Saudi Arabia has been trying to gain back market share from U.S. shale oil production, insisting it would continue to produce oil even if prices fell dramatically — even if they fall to $20 a barrel. U.S. producers have countered by keeping up their production.
The latest figures mean U.S. crude oil inventories now stand at 482.4 million barrels, the highest level for this time of year in at least 80 years.
New York futures slid 6.6 per cent, its biggest one-day slump in two months.
West Texas Intermediate for May delivery dropped $3.56 to $50.42 a barrel on the New York Mercantile Exchange. The contract closed Tuesday at $53.98, the highest since Dec. 30.
Concerns about a growing oversupply, and the continuing downward pressure on prices, are magnified by the possible lifting of oil-related sanctions against Iran.
The U.S. Energy Information Administration warns oil prices could tumble by as much as $5 to $15 a barrel next year if a full comprehensive agreement is reached on Iran’s nuclear program, resulting in the lifting of sanctions.
Iran is believed to hold at least 30 million barrels in storage, and more importantly, could ramp up production by at least 700,000 barrels a day by the end of the 2016.
Iran produced 2.85 million barrels a day in March, according to data compiled by Bloomberg.
“There would be the initial hit of whatever they have sitting in storage that’s ready to go,” said Cieszynski. “The second phase would be over a longer period, where Iran would ramp up production.”
He added it could take a year or two years to rebuild production. “You wouldn’t just see the taps flowing immediately,” Cieszynski said.
The timing and order that sanctions could be suspended is uncertain. In addition, the pace and volume at which more Iranian oil can re-enter the market is also unknown.
Oil prices seem to have bottomed out in the $45 to $55 range for now, “but I have always said you can’t rule out $40 or $35,” said Cieszynski.
That’s because the 2008 low was at about $35, and Cieszynski said he wouldn’t be surprised to see it retested at some point in time, “which could be in the next few weeks or even a year from now.”
He added that some oil-producing countries have suggested they could still be profitable at $40 a barrel. “The question has always been, ‘What will be the price that causes enough pain for people to cut back production?’ ” he said. “No one really knows.”
Cieszynski said while energy companies in the U.S. and Canada have cut back on drilling, nobody has gone the next step to cut back on production.
The EIA said in its report that West Texas Intermediate crude, the U.S. benchmark, will average $70 next year and Brent will be at $75.03. The forecasts don’t take additional Iranian supply into consideration.
As an oil-exporting country, Canada feels the immediate impact from the sudden drop in prices, where jobs are slashed in oil-producing provinces such as Alberta.
But Cieszynski said the benefits will eventually emerge, especially from the weaker Canadian dollar.
“But those take longer to come to fruition,” he said. “So what you’re working through now, you have had all the negative impacts, but you haven’t had the positive impacts kick in yet.”