Oil Markets Recover From Panic Attack but Prices Will Go Lower

Crude markets had a panic attack in August and September that sent prices soaring. Sanity is now returning. Prices have fallen but are likely to move even lower over the next few months.

The panic attack was caused largely by Trump’s August 7 announcement that sanctions would be re-imposed on Iran. Anxiety about the effect on oil supply and prices was reasonable but the reaction was hysterical.

From August 15 to October 1, Brent December futures spreads increased $3.01 (175%) from $1.72 to $4.73. Brent prices increased $15.53 (22%) from $70.76 to $86.29 (Figure 1).

Figure 1. Brent Dec spreads collapsed from $4.73 to $1.52 since Oct 1 & are now less than when price rally began after announcement to re-impose Iran sanctions in mid-August. Front-month Brent down from $86.29 to $76.17 but still higher than $70.76 Aug 15 price. Source: Barchart and Labyrinth Consulting Services, Inc.

Then spreads and prices collapsed. By October 24, spreads had fallen from $4.73 to $1.52, less than when the price rally began. Front-month Brent price decreased from $86.29 to $76.17. Prices and spreads recovered slightly on October 24 closing at $76.89 and $1.76, respectively.

It seems unlikely that the correction is over. The timing depends on how long it takes for markets to fully recover from what Vitol’s Ian Taylor calls the supply fear factor. After 6 weeks of fear, markets must adjust to the reality that the “oil market is adequately supplied for now.”

Clearly markets are concerned about more than just Iran. Falling or uncertain output from the problem children Venezuela, Libya and Nigeria, and take-away constraints from the Permian basin are critical.

Iran, however, is different because it is a completely artificial supply crisis. It was a choice made by Donald Trump and his advisors. Markets are used to the uncertainty of its problem children but not to the apparent certainty of an executive decision. The reaction was consistent with the cause—certain and linear.

It was also wrong.

World liquids production has, in fact, increased 2.91 mmb/d so far in 2018. Much of that increase came from producers other than U.S. & OPEC (Figure 2).

Figure 2. World liquids production has increased +2.91 mmb/d TYD 2018. Output from rest of the world excluding U.S. and OPEC increased after May 2018. Source: EIA STEO and Labyrinth Consulting Services, Inc.

That data, of course, includes losses from Venezuela, Iran, Libya, and Nigeria.

Both OECD and U.S. commercial stocks increased in September moving comparative inventory (C.I.) 30 mmb higher and closer to the 5-year average (Figure 3).

Figure 3. OECD minus U.S. C.I. rose +30 mmb in Sept as both OECD and U.S. stocks increased. Yield curve suggests Brent avg monthly price of $78.89 was ~$4 over-valued. Current front-month Brent price also over-valued at $76.71. Source: IEA, EIA and Labyrinth Consulting Services, Inc.

This data is consistent with the July 2017-through-present yield curve shown in Figure 3. Based on that trend line, the September Brent average price of $78.89 was approximately $4.50 over-valued. Today’s front-month price of $76.23 is still over-valued by about $2.00.

Data further suggests that OECD and U.S. C.I. may have reached a minimum and will continue building later in 2018 and into 2019.

“We expect an oversupply in 2019, we may have to go back to the reduction,” Saudi Energy Minister, Khalid al Falih commented in late September.

Positive oil supply growth began in the first quarter of 2018 and price generally lags the shift to positive growth by several quarters (Figure 4). This is important because it signals a probable lessening of or end to the upward movement of oil prices that began in early 2016.

Figure 4. Oil prices will probably be lower going forward into 2019. Positive world liquids supply growth began in 1Q 2018. Price generally lags shift to positive supply growth by several quarters. Source: OPEC, EIA STEO and Labyrinth Consulting Services, Inc.

Year-over-year supply growth for the third quarter of 2018 was 2.35 mmb/d according the the IEA latest Oil Market Report. Year-to-date supply growth is about 2 mmb/d.

The last time a secular shift like this occurred was in early 2014. The previous deficit shifted to supply growth in the first quarter of 2014. Prices, however, remained above $100 until the third quarter. Brent begin to fall in earnest and then collapsed during the fourth quarter of 2014.

I am not suggesting that another oil price collapse is going to occur in 2019. I am saying that data indicates that lower rather than higher oil prices are more likely going forward.


  • Hello Mr. Bergman

    In principle I would like to have an understanding of the major English language and also knowledge to be able to interpret the graphics. Sometimes I think it would be extraordinary for you to make a brief summary for people who are not very knowledgeable about the subject, maybe I am the one who has severe knowledge problems hahaha

    One question the costs of extraction of unconventional oil could go down to get a price of $ 35 or less per barrel.

    Are you still claiming that Shale is not a revolution-it’s a retirement party?

    I tell you that here in Argentina the price of fuel ravages the economy that has devalued the dollar more than 100% in one year and the government has released the prices of fuels and these have increased more than 70% in what goes the year, without taking into account what went up the previous year. The government is betting on the Vaca Muerta deposits, but I do not know what the cost of its ectraction is. In addition, in Argentina corruption is framed in many places of society, unfortunately.

    These are not good times for Argentina, and it is a beautiful country.

    Always grateful for sharing your knowledge and I tell you that I make my best efforts to understand those graphics that seem to be done in Sanskrit hahahah

    The best for you and your followers

    • Arthur Berman

      Carlos, Unconventional oil will probably never reach a break-even price of $35/barrel unless the global economy collapses and currencies are substantially de-valued. There are limited areas of some plays that may break-even at those prices today but I see no plays or operators whose average break-even price approaches that level.

      Unconventional oil and most remaining conventional oil reserves are ~40% more expensive in constant dollars than prices as recently as 2005. The retirement party continues!

      You and your fellow countrymen in Argentina have my sympathy. Debt and government mismanagement & corruption hurt everyone.


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