Crude price plumbs new depths as glut looks set to worsen

Though estimates on the quantum and timing of additional crude-oil flows from a sanctions-free Iran settled in a wide range, the mere prospect of the new flood, possibly starting in early 2016 and rising to 1 million barrels per day by year-end, brought the bears out in full force.
A strengthening greenback – the US dollar index vaulted to a three-month high above 98 on July 20 – along with growing jitters over the health of the euro-zone and Chinese economies, completed the formidable troika that threatened to push crude below the year’s mid-$40s nadir.
With the macroeconomic outlook for Greece and potentially Europe under threat, the International Energy Agency said growth in European oil demand likely slumped from its strong 600,000bpd or 4.6 per cent year-on-year rise in the first quarter to an anaemic 80,000bpd in the second quarter.
In China, the Shanghai Composite Index’ crash, which wiped out more than 30 per cent of the stock market’s value within four weeks of hitting a seven-year high on June 12, followed by the release of weak manufacturing data, stoked fears over the world’s second-biggest economy, and the largest consumer of energy.
China’s manufacturing purchasing managers’ index, a key economic indicator, dropped to a two-year low of 47.8 for July from 49.4 in June as measured by Caixin, while the official PMI came in at 50, on the border between contraction and expansion.Though China’s crude-oil imports hovered around record highs of 7.2 million barrels per day in June, its apparent oil-demand growth in the month as calculated by Platts slowed sharply to about 4 per cent, a far cry from the 10-per-cent year-on-year rise seen over the March-to-May period.
With China shrinking in the demand-growth picture, the start of the third-quarter “shoulder’ season between the summer and winter demand peaks, and expectations of a heavier refinery maintenance season this autumn, the players braced for a few months of sagging consumption.
The biggest cloud hovering over an already oversupplied market was Iran, gearing up to increase its oil exports after striking a historic deal with six world powers on July 14 that paved the way for the lifting of years of crippling sanctions against its oil industry.
Oil Minister Bijan Zanganeh’s growing rhetoric over how quickly Iran would boost supplies, though constantly tempered by more modest projections by independent market watchers, reached a crescendo when he proclaimed last Sunday that Tehran would raise output by 500,000bpd within a week of sanctions being lifted.
Though Zanganeh has put the Organisation of the Petroleum Exporting Countries on notice to make space for its increase, the producers’ group appears nonchalant. OPEC is confident of accommodating the additional flows, and there have been no requests from any member for an extraordinary meeting before December, secretary general Abdalla el-Badri said July 30.
Opec, in fact, continued to march in the opposite direction, with June output climbing 170,000bpd from May and to its highest level since August 2012 at 31.28 million barrels a day, according to a Platts survey.
In the face of the global supply-demand chasm persisting at more than a million barrels per day, in contrast to expectations at the start of this year for a re-balancing in the second half, “lower for longer” became the new market mantra.
Though the spectre of a worsening global supply-demand imbalance prompted a sell-off across the crude-oil complex, West Texas Intermediate (WTI) came under greater pressure from swelling inventories in the United States, averaging a discount of $5.67 a barrel to Brent on the futures market versus $3.93 a barrel in June.
The Energy Information Administration reported a build in US commercial crude-oil inventories in three of its five weekly reports through July, suggesting a rising tide from strong domestic production and growing imports.
US crude-oil imports, helped by a narrowing Brent-WTI spread in the prior weeks, surged to a year-to-date high of 7.94 million barrels per day in the week to July 17. However, the weakening of WTI through July was expected to disincentivise imports of Brent-linked Mediterranean and West African oil into the US, easing the stock build and narrowing the spread again.
What the market continued to struggle with is how to triangulate US crude-oil prices, rig count, and tight oil output.
The US oil-rig count broke a nearly six-month-long spell of relentless decline to begin climbing at the end of June and, surprisingly, ended July with a net addition of 36 rigs despite price rout during the month.
Cost deflation and improving productivity are offsetting the nearly 60 per cent slide in US oil rig count from its early October 2014 peak of 1,609 to 664 as of July 31. At $50/barrel, the Permian and Eagle Ford shale plays have close to 20 per cent internal rates of return, while in the Bakken they are still a healthy 14 per cent, according to Bentek Energy, a unit of Platts.And the plot thickens: US tight oil production could be about to get a shot in the arm from hydraulic refracturing, a technology hitherto deployed on vertical wells, but now being touted by oilfield service providers as a way to coax out more oil from existing horizontal wells at much lower costs.
We will have to wait to see how widely this is adopted and what results it yields.
In the meantime, those waiting for shale to bail best not hold their breath.

Vandana Hari is the Asia editorial |director at Platts, a global energy, |petrochemicals, metals and agriculture information provider and a division of McGraw Hill Financial. She can be |contacted at [email protected].