Price of crude oil resumes its descent
Article by Stanley Reed published New York Times New York Edition 14 March 2015under the headline:
Oil Prices Drop as Production Hums Along Despite a Brimming Supply
LONDON — Just as theoil market appeared to be stabilizing, the price of crude resumed its descent on Friday.
The drop, of about 4 percent, came after a report from the International Energy Agency warning that oil pouring into tank farms in the United States might “soon test storage capacity limits.”
The agency, whose reports are closely monitored by oil traders, said that overflowing storage “would inevitably lead to renewed price weakness.” American production of oil continues to increase despite recently announced cutbacks in new drilling by producers.
The price of West Texas Intermediate, the American benchmark, fell to around $45 a barrel on Friday, while Brent, the international benchmark, fell below $55 a barrel.
The Department of Energy has proposed adding five million barrels of oil to the Strategic Petroleum Reserve. The purchase, which requires congressional approval, would be added in June and July. But 9.4 million barrels of oil a day are being produced in the United States. Kevin Book, an analyst with ClearView Energy Partners, said that the proposed purchase was not an attempt to support falling prices but instead “appears to derive from a statutory obligation.”
Richard Mallinson, an analyst at Energy Aspects, a London-based research firm, said that with winter coming to an end in much of the world, the oil market was most likely due for a spell of softness. Refineries in Europe and Asia will now be undergoing routine maintenance, leading to a period of weaker demand for crude. “We are expecting another period of weakness,” Mr. Mallinson said in an interview.
Additionally, striking refinery workers in the United States reached a tentative deal this week to end their walkout. Although the walkout affected 12 refineries, it had minimal impact on production as managers and other workers kept the plants running.
While prices rose to more than $60 a barrel for Brent recently, the fundamentals in the market had not changed greatly since oil prices hit multiyear lows in the early part of this year, the agency said in its report. The supply of oil from the United States, which has increased production by more than four million barrels a day since 2009 — more than the total output of either Iraq or Iran — shows little sign of slowing down, the agency said.
At the same time, Russian exports have been rising, and Saudi Arabia, the third of the world oil production leaders, increased output slightly in January and February.
The Saudis under King Salman, who succeeded his brother Abdullah in January, are not showing any signs of readiness to abandon their policy of maintaining production and defending their share of the market regardless of the consequences for prices.
Those low prices have helped lift demand for oil to higher levels than forecasters expected in places like India, Brazil and Indonesia. Even China, whose economy is widely reported to be slowing, is still lapping up lots of crude. Overall demand, which is up more than a million barrels per day over last year, according to Energy Aspects, has trimmed expected inventory builds outside of the United States.
Stronger-than-expected global demand helps explain the wider-than-usual gap in pricing between Brent, which is used as a reference in much of the globe, and W.T.I. With operators in the United States largely barred from exporting crude, the surplus barrels have nowhere to go, and inventories have risen to near record levels.
The price snapback did not materialize out of thin air. It was aided by the frigid weather in the Northeast United States, which raised demand for heating oil, and other factors like flows into commodity investment funds.
Still, seasoned traders were taken by surprise by the roughly 30 percent rise in Brent prices to over $60 a barrel since the six-year lows in January. When oil was scraping bottom, for instance, trading companies like Trafigura Beheer booked fleets of tankers to use as storage to take advantage of the steep spread between current prices for crude and those further out. With current prices having risen sharply, the trading companies have returned most of those ships to normal duties.
But now the mood is turning. “These props to the market are now starting to buckle,” analysts at Citigroup wrote in a recent note to clients. If the United States and other global powers manage to reach a deal with Iran over its nuclear program, for instance, that could clear the way for a big surge in Iranian production.
Iraqi production, which was disrupted by weather in February, has also come back. Exports from Gulf Arab states like the United Arab Emirates and Kuwait are also running strong, analysts say, aided by aggressive discounting of their crude.
“There is so much oil out there, and it looks like it is going to build up some more,” said Michael Lynch, president of Strategic Energy and Economic Research, a market analysis firm.
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