Potential triggers for crude oil prices
The Energy Information Administration reported on April 1 that total US oil production fell for the week ending on March 27, falling 36,000 barrels per day to 9.38 million barrels per day. With the US production finally dipping, it may augur a new phase for oil markets in which production cutbacks could lead to higher prices.
It appears as if oil prices could be on the verge of a rebound, with new data showing that the US oil patch is hitting an inflection point. While specific shale regions have posted production declines, overall US oil output managed to edge up in recent months.
Oil futures climbed more than $1 a barrel after Saudi Arabia raised prices for crude sales to Asia for a second month, signaling better demand in the region. International benchmark Brent regained ground after tumbling as much as 5 percent few days earlier, when a preliminary nuclear deal was finally reached between world powers and Iran. More Iranian oil could enter global markets if the announcement is followed by a comprehensive deal by June. But analysts warned a ramp-up in exports could take months and would likely not happen before 2016.
At present, these factors can trigger crude oil prices either north or south;
Iran negotiations
A breakthrough in negotiations on April 2nd sent oil prices down immediately but turned out to be temporary. Oil prices corrected themselves once the markets realized that Iranian oil will not begin flowing overnight, as there are still several months before a final accord is signed and even more time before the UN Nuclear Agency confirms compliance.
If sanctions are lifted, Iran’s oil exports may increase by only 500,000-700,000 barrels a day given the underinvestment in Iran’s oil sector, while around 30 million barrels of floating storage could also come to market.
However, over the long-term, new Iranian oil will keep prices from rising too much. On the flip side, a breakdown in the ongoing talks between now and June will raise geopolitical tension and ensure Iranian crude stays on the sidelines, resulting in higher oil prices.
US production and oil rigs decline
It is important to watch levels of US production and oil rigs update. Consistent weekly drops will put upward pressure on prices. US oil rigs fell by the smallest number in 16 weeks, a sign that America’s oil drilling crash may be nearing its end.
Drillers idled 11 oil-directed rigs, dropping the number to 802, Baker Hughes reported. The rig count has dropped 50 percent since October, an unprecedented retreat, as the drop in oil prices has made production less profitable.
But production is not slowing yet, and new efficiencies in US drilling and pumping may make raw numbers of rigs in the field misleading. The US will pump 9.3 MMbopd this year, the most since 1972, despite the fewest rigs in the field in almost four years, according to the Energy Information Administration.
Oil storage and demand
Fears have arisen that oil storage is running out. Oil diverted into storage has skyrocketed, and key hubs have seen their storage tanks filling up rather quickly. With production slowing and a much improved pipeline network, storage will probably not reach its limits. Once that becomes apparent, investors will shed their fears and bid up oil prices.
Demand is starting to look stronger as well. Major US oil refineries are also taking advantage of the glut. Normally a time for spring maintenance, refineries processed 15.7 million barrels per day for the week ending on March 27, a record level for this time of year. As we move through spring and summer approaches, refineries will ramp up processing even further, providing a lift to demand.
China taking advantage of low prices
China has been taking advantage of collapsed prices by stepping up its purchases of oil to fill its strategic petroleum reserve (SPR). That provided a bit of a demand boost in recent months, putting a floor beneath prices. But now China’s SPR is nearly full, so its imports could plateau for a while. Lower oil demand, or at least demand not growing as fast as expected, will keep oil prices from rising too much.