Oil & Energy
How Much Lower Could Oil Prices Fall?
On Friday, April 7th, Brent crude closed at over $85 per barrel. That was a few days after OPEC+ had announced it would reduce its production by an additional 1.16 million barrels daily.
Fast forward a month, and Brent is almost $10 cheaper. Despite the promised supply cut, despite a production suspension in Kurdistan, and despite China’s demand growth, prices have fallen. And they may have further to fall. For a while, at least.
The big reason for the price drop we witnessed over the past four weeks was economic sentiment, especially economic sentiment in the United States.
Analysts loyal to the Federal Government are beginning to run out of euphemisms for “recession.” The media are getting bolder with their use of the word. No wonder oil prices are down.
There are plenty of causes for concern. Diesel demand is down after months of worry that the U.S. is facing a diesel shortage because demand is exceeding supply.
Well, that’s one thing people need not worry about anymore. Because diesel demand is down by a lot, and that spells bigger trouble: call it a slowdown, call it a correction, but what it comes down to is what one analyst called a recession.
“If you were looking at it in the closet, and not knowing what the wider economy was doing, you would say we’re seeing some sort of an industrial recession”, Tom Kloza from the Oil Price Information Service told the FT in comments on the diesel demand situation.
Inflation, meanwhile, is in decline but still a lot higher than the Fed’s comfort level at 5% for April, prompting yet another rate hike last week that did nothing for oil bulls.
That was because of the traditionally inverse relationship between interest rates and oil demand as the former boost the dollar, making oil more expensive in absolute terms.
At the same time, the manufacturing sector has been shrinking for six consecutive months, according to the Institute for Supply Management.
It shrank yet again in April, although S&P Global estimated an expansion in the sector for last month. It begins to become clear why it is so hard to call a recession in the U.S. for now.
Based on the latest oil price trends, there is definitely a recession, whatever the actual data says. The good thing is that this recession seems to be, at least partly, in the minds of oil traders rather than in the actual U.S. economy, where the service sector is growing despite manufacturing’s shrinking. Not all is lost until another bank collapses with a bang.
The banking sector tremors of recent weeks have also had a lot to do with oil prices: fears of a banking meltdown have rippled into fears of a broader meltdown, and that has translated into a fear of oil demand destruction and, consequently, a selloff. But here’s the thing. The supply situation may be about to change.
China’s oil demand topped 15 million barrels daily in March, breaking a record. U.S. crude oil inventories are now below the five-year average for this time of the year after a long streak of weekly declines.
And, according to Reuters’ John Kemp and historical patterns, U.S. oil and gas production growth may slow down significantly over the next months.
In a column earlier this month, Kemp noted the several months’ lag between price movements and drilling activity in the U.S., which means that it takes several months for drilling to expand in any noticeable way after a sustained rally in prices.
By the same token, Kemp noted, it takes several months between a sustained price decline and the consequent decline in drilling activity.
The thing is that U.S. production was already in decline in February, according to the latest official data. The total was nearly 1.2 million bpd higher than the average for February 2022, but it was also more than 80,000 bpd lower than the average for January 2023.
That’s not a whole lot when you’ve got a total of 12.5 million barrels daily, but it is a very different development from what the Energy Information Administration had predicted for February: another output rise to a record high. The EIA is now predicting that the record high will be hit in March.
If the EIA guesses right, prices could go further down, especially if demand for fuels remains subdued now that driving season is beginning. If it guesses wrong, however, oil will likely gather steam again unless another flare-up in recession worry occurs, of course.
“The selloff was far greater than what market balances are showing — namely lower inventories with the prospect of inventory draws as the northern hemisphere’s summer unfolds,” Citi’s commodity chief Edward Morse said, as quoted by Bloomberg, earlier this month.
In other words, price movements in oil are not in sync with oil’s fundamentals, and a correction may be only a matter of time.
However, as clearly shown by the price decline from the past month, expectations about fundamentals are at least as important, if not more important, than the fundamentals themselves. All it could take is one more bank domino piece falling.
Slav reports for Oilprice.com
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.