Oil Price Drop
An eight per cent slump in oil prices on Monday, July 6, that left Brent crude trading at US $55 per barrel put paid to hopes of an oil price recovery this year. The fears of a potential Grexit and the rout on the Chinese stock market were the main reasons for concern.
A further fear factor was the potential for an agreement between Iran and the P5+1 nations about that country’s controversial nuclear programme and an eventual lifting of U.N. sanctions against the country, allowing it to export oil freely on the world market.
But these fears proved to be short-lived the following day, with traders judging that the fallout from a potential Grexit was not alarming enough. This was followed by China attempting to deal with its weakening stock market, all of which contributed to a US $2 per barrel rally.
None of this will be of comfort for oil market players, as a period of serious price volatility looms. China has been the main source of world commodity demand over the last decade, and its weakening economy and sick stock market will continue to keep the pressure on lower oil prices.
Iran Deal or No Deal
Any deal over Iran’s nuclear programme may have a limited effect. Even in the most optimistic scenario, Iran would be hard-pushed to double its oil production, as many analysts fear. That will require serious long-term capital investment. The country is believed to have about 80 million barrels in stocks around the Persian Gulf, but the release of these are unlikely to flood the market enough to alter the oil price trend.
The Greek crisis is more likely to affect the European gas market that the world oil price. The country’s participation in a grandiose planned gas transportation project from Russia or Central Asia could remain a pipe dream.
The Greek economy is unlikely to recover without a serious attempt at debt forgiveness and/or debt securitisation. These options are excluded by the European Union and the European Central Bank, so the country will remain in economic limbo for the long term.
U.S. Shale Enigma
Despite predictions of its demise with the oil price slump, many U.S. shale oil producers are not only surviving – they are planning to increase their rig count. Pioneer Natural Resources is adding rigs to its operations in the Texas Permian Basin, while a smaller producer, WPX Energy, claims that the US $50 looming oil price has made no difference to its operations in the North Dakota Bakken Shale. WPX is also adding more rigs.
In fact, in early July the U.S. rig count began to rise for the first time since December 2014, despite bears like Goldman Sachs predicting a US $45 West Texas Intermediate (WTI) price by October this year. On the other side of the border, ATB Financial, the government-owned bank of the province of Alberta, predicted that West Texas Intermediate (WTI) prices could well inch towards US $60 per barrel during the second half of 2015.
All this is happening as the major oil producers – Saudi Arabia, Iraq, Russia, Canada and the U.S. – are pumping all the oil they can manage. Without a serious demand rise during the northern hemisphere’s summer tourist season from transportation and air conditioning, much of this production will go into global stocks. This means that there will be eight quarters in succession of stock builds, meaning the world will have a lot of stored crude oil.