The world's oil market is rebalancing faster than
expected due to several serious outages, but for now there is enough oil
in storage and excess capacity to keep prices from spiking.
"We've strung together an impressive
number of outages and supply disruptions for the moment, but there's
every incentive in the dire straits the industry's been in to get these
barrels on line," said John Kilduff, partner with Again Capital.
Outages and supply disruptions in
Canada, Nigeria, Venezuela, and other producing regions have reduced oil
production by an estimated 3.8 million barrels a day. Some of those
outages should be temporary, and could bring a wall of oil back to the
market once they are resolved. There is also the potential for more
production from Saudi Arabia, Iran and even the U.S. - if prices rise
enough to enable America's shale producers to restart some drilling.
"Some of it's temporary, and if it
goes on long enough, there will be longer lasting implications," said
Michael Cohen, head of energy commodities research at Barclays. In
Canada, an estimated 1.2 million barrels a day are offline due to forest fires in Alberta.
The uncontrolled fire, covering 704,000 acres, moved toward energy
production facilities Tuesday, after jumping a fire break area,
according to Reuters.
Suncor shut down its base plant,
and said it had not sustained any damage, while Enbridge's Cheecham
crude tank farm was less than a mile away from fire but fire fighters
had the fire under control, according to Reuters.
"This is bad," said Cohen, adding
it's the biggest disruption in North America since Hurricane Ike in
2008. "It looks like it's getting worse before it gets any better...It's
hard to say. Is it two weeks? Is it four weeks? If it goes on for
another two weeks we're going to have some medium term implications for
some of the projects up there."
The industry had been hopeful the fires would be
out and they would start sending workers back to their jobs just several
days ago. "We had this big U-turn in events over the past 48 hours,"
said Jackie Forrest, vice president energy research at Arc Financial
Corp. "It's getting difficult to predict when this wild fire will be put
out." She said the fact it has moved north means it will take longer
for the industry to restart oil sands production, now down by about 50
percent.
The Canadian situation is
different from other outages in that it is seen as a short-term problem,
due to an act of nature, and while uncertain, the situations in Nigeria
or Venezuela could be harder to predict.
In Nigeria, militants have knocked oil production offline as the country struggles with the impact of lower oil prices on its economy.
"If Nigeria goes offline, it's sticky. These armed militants are very intent on shutting down production. They have the capacity to do so," said Helima Croft, head of commodities research at RBC Capital Markets.
Venezuela is another trouble spot, politically and economically. It is producing about 2.3 million barrels a day, but analysts see it as in a state of decline.
"If Nigeria goes offline, it's sticky. These armed militants are very intent on shutting down production. They have the capacity to do so," said Helima Croft, head of commodities research at RBC Capital Markets.
Venezuela is another trouble spot, politically and economically. It is producing about 2.3 million barrels a day, but analysts see it as in a state of decline.
"Things are falling apart. People aren't getting
paid. Equipment is not being brought in, and that's precipitating
production declines," said Eric Lee, an energy analyst at Citigroup. He
said the situation could lead to failures in infrastructure, such as
ports, pipelines and refineries. Venezuelan officials this week said
they were able to secure a better loan-for-oil deal from China, buying
time on debt payments.
"When prices are low, you strip out the oil revenue and things start to gum up," said Cohen. "You've got people upset in Nigeria, Iraq and Libya, and part of it is they're not getting paid off…You've got Kirkuk oil field off line and you have a government in Iraq that is in a serious state of disarray."
But Cohen said oil could return to the market from disruptions and that could send prices lower again. Brent crude was trading just under $50 Tuesday evening, and West Texas Intermediate was at about $48.50, up about 11 percent in the past week.
On the other side of the equation, there are also major producers that could add supply.
One of those is Libya, and news of a deal that could lead to the resumption of some production put pressure on oil prices Tuesday.
"It's a good sign if the government in the east is going to recognize the UN government, but we'll have to see on this. The story changes day to day," said Croft. "They're at 150,000 and they have capacity at 1.6 million," she said. "Is it really a sustainable situation that you can get back to 600,000 or 700,000 on a longer term basis?" She said Libya could get back to production of about 350,000 barrels a day.
"When prices are low, you strip out the oil revenue and things start to gum up," said Cohen. "You've got people upset in Nigeria, Iraq and Libya, and part of it is they're not getting paid off…You've got Kirkuk oil field off line and you have a government in Iraq that is in a serious state of disarray."
But Cohen said oil could return to the market from disruptions and that could send prices lower again. Brent crude was trading just under $50 Tuesday evening, and West Texas Intermediate was at about $48.50, up about 11 percent in the past week.
On the other side of the equation, there are also major producers that could add supply.
One of those is Libya, and news of a deal that could lead to the resumption of some production put pressure on oil prices Tuesday.
"It's a good sign if the government in the east is going to recognize the UN government, but we'll have to see on this. The story changes day to day," said Croft. "They're at 150,000 and they have capacity at 1.6 million," she said. "Is it really a sustainable situation that you can get back to 600,000 or 700,000 on a longer term basis?" She said Libya could get back to production of about 350,000 barrels a day.
"I look at Libya and I'm still a pessimist for
now. This is plan "B" for ISIS," she said. The presence of ISIS near the
oil facilities is a threat. "They're not going to try to operate it.
They're trying to make it inoperable."
Besides Libya's expected increase in production, Iran has been returning oil to the market more quickly than expected.
Saudi Arabia has said it could add
another million barrels to the market this year, and analysts are
watching to see if it will do that. Saudi Arabia has made clear it is
ready to ramp up production to meet customer demand but it changed the
dynamic of the market when it pushed OPEC to move to let the market set
pricing instead of adjusting output. That strategy led to a collapse in
oil prices that took WTI to $26 per barrel. Oil has since been
recovering from that low, and has received an extra lift from the
outages.
"The political change in Saudi
Arabia is going to change not only Saudi Arabia but the oil market,"
said Daniel Yergin, vice chairman of IHS. "In terms of achieving their
objectives, they want to enhance their position of being the low cost
supplier."
Yergin said it's striking that the
oil disruptions have had such little impact. "You still have a big
overhang of inventories, but after 18 months, the market is turning and
it was time for a turn," he said. "Supply and demand in the second half
is pointing to around $50 a barrel. But that's barring any major
disruption. If we see further disruption that could put more upward
pressure on prices."
Yergin said U.S. shale producers
could start to resume some drilling activity and that could add barrels
to the market. "Certainly at $50 that's the number that starts to
stabilize U.S. shale. I think people come back and start putting on more
drilling rigs. People, at $50, will be a lot more efficient than they
were before," he said.
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