Gloomy glut
Global oil markets shrugged off the expected news of OPEC extending oil production cuts and oil prices tumbled.
Sometimes you get what you ask for and it’s still not enough.
The Organization of Petroleum Exporting Countries — along with other large producers, including Russia — on Thursday announced plans to extend their 1.8 million barrel per day oil output cut another nine months in effort to drive up oil prices.
Instead, global oil markets shrugged off the expected news and tumbled. Domestic benchmark West Texas Intermediate crude shed $2.46, or 4.8 percent, Friday to close at $48.90 a barrel.
The S&P Energy Index dropped almost 11 percent Thursday to levels unseen since August 2016.
Thursday’s sell-off came after the oil price jumped 98 cents to $50.33 a barrel on May 19 when Saudi Arabia reached the deal the rest of OPEC approved Thursday.
Some analysts and industry observers on Thursday expressed disappointment that the OPEC cuts were not deeper.
Others pointed to concern that U.S. production continues to grow.
Storage levels in the United States and worldwide have been a big factor in depressed oil prices over the past two years. The U.S. glut this week declined by 4.5 million barrels, but still is 10.7 million barrels more than one year ago.
At Cushing — the country’s largest commercial hub — storage dipped by 700,000 barrels this week to 65.6 million barrels, which is down 2 million barrels from one year ago.
‘We’re in the shoulder months ...’
Continental Resources Inc. CEO Harold Hamm has downplayed concerns about the storage levels.
“We’re in the shoulder months, so you don’t use as much oil,” Hamm said in an interview after the company’s shareholder meeting last week.
“We’re starting to see finally about 1 million barrels per day draw on inventories. If that continues, and I expect it will, we’ll see this play out to draw down this 350 million barrel (global) overhang.”
Others, however point more to continued U.S. production and contracts that require more drilling.
Daniel Fine, associate director of the New Mexico Center for Energy Policy, spoke at the Interstate Oil and Gas Compact Commission annual meeting in Oklahoma City earlier this month.
“I forecast that when they meet in Vienna, they probably will extend the agreement, but there will be a reaction from the commodity markets that nothing is new, and I would say my forecast is a downturn in prices,” Fine said following his May 9 presentation. “We have much oil, some would say too much oil.”
A series of multibillion-dollar deals in the Permian basin of west Texas and southeast New Mexico requires companies in the area to increase drilling to pay for the deals, regardless of whether the industry activity is justified by market forces, Fine said.
Hamm, however, said U.S. production is only part of the global picture.
“You have to consider what demand is in the world,” he said. “The early estimate was that there would be 1.3 million barrels of new demand in the world this year. The EIA came out recently and said demand was going to be 1.7 million barrels per day.”
Some of the key questions will be answered over the next several weeks as peak travel season takes off.
Others will take much longer to shake out.