Investors with hopes of the global oil market steadying and prices stabilising around the $US50 to $US60 a barrel level, received a rude reminder to the contrary last week.
Oil futures fell sharply on Friday to end a week which saw a nasty 9% plus slide in global oil futures prices (thanks in part to the strong US dollar) taking West Texas type crude prices in the US to a new low for 2015.
Not even another fall in the number of rigs drilling for oil and gas across the US managed to change the negative sentiment around markets last week.
Friday’s monthly report from the International Energy Agency on the oil market pointed to the fragility of hopes the global slide had steadied, and added more concern by pointing out that the glut of crude supplies and tightening storage capacity in the US may cause prices to weaken further.
US West Texas type crude futures slumped $US2.21, or 4.7%, to settle at $US44.84 a barrel in New York. That left prices down 9.6% for the week.
And Brent oil futures in Europe lost $US2.41, or 4.2% to settle at $US54.67 a barrel, a loss of 8.5% for the week.
Contributing to the slide for oil was the surging US dollar which gained ground across the board against major currencies, especially the euro which hit a new 12 year low on Friday night.
While the dollar has been undermining oil and most commodities (but not copper which rose 2.5c over the week), more gloomy news on supply and demand for oil hit sentiment.
Not even a report that the US government will buy five million barrels of US West Texas type crude to rebuild its strategic stockpiles impacted the oil market. The oil will be bought over the next few months and will replace a similar amount of oil sold last year.
The government made it clear it was buying now to take advantage of the current low prices.
The weekly rig use report from Baker Hughes reported that the number of rigs drilling for oil and gas as of March 13 fell by 67 to 1,125. The rig count is down 684 from the same time last year. The number of rigs drilling for oil fell 56 to 866.
But that was nowhere enough to offset the pessimism from the IEA’s latest monthly report.
It said the relentless rise in US oil supply, which in a large part is behind the oversupply in the oil market.
“U.S. supply so far shows precious little sign of slowing down," the IEA said. “Quite to the contrary, it continues to defy expectations."
Some analysts believe that should US supplies continue to mount (they are just under 450 million barrels at the moment), a storage crisis could develop, especially at Cushing in Oklahoma where oil bought under futures contracts is deliverable.
Storage space there is getting scarce and some industry figures believe there could soon be distressed selling of oil unable to be stored there, which would place further downward pressure on prices.
And a breakthrough in talks in Switzerland on Iran’s nuclear program could also see oil prices forced lower by an increase in Iranian oil exports.
But the big concern is the still high level of US oil production which so far refuses to fall, despite the cutbacks in exploration and drilling.
Total US production averaged 12.6 million barrels a day (mb/d) in February, up from its 2014 average of 11.8mb/d.
The IEA said US crude stocks at record levels “may soon test storage capacity limits” and this could lead to renewed price weakness and “trigger the (production) cuts that have so far remained elusive".
The Agency expects US production growth to slow in the second half of this year and to grow at 12.6mb/d on average in 2015, up 760,000 b/d compared to 2014 (In other words, production won’t grow very much from February’s level).
That rise this year will be just under half the 1.6mb/d rise in output reported for 2014.
Looking at the world supply situation in February, the IEA said it rose by 1.3mb/d to 94mb/d in February compared to the prior year.
This was led by a 270,000 b/d gain in non‐OPEC production to 57.3m b/d, which coincided with a 90,000 b/d pullback in Opec crude supply to 30.22m b/d.
Lower output in Libya and Iraq was offset by higher supplies from Saudi Arabia, Iran and Angola.
Global oil demand rose by 900,000 b/d in the fourth quarter of 2014, compared to the same period the year before, and 1m b/d year-over-year in the first quarter of 2015.
The IEA raised its full-year forecast for 2015 by 75,000 b/d to 1mb/d, taking global demand to 93.5m b/d .
The IEA said that although "tentative signs of a demand recovery have emerged…there are still few firm signs at this stage that lower prices are giving the [global] economy a real boost".
In other words, the lower rices have yet to convince consumers and business to spend more of their savings.
