Crude oil prices are trying to stabilize as traders and oil companies try to predict when oil production will find equilibrium with demand. There is a wide degree of different thinking on this topic, but I predict it will happen much sooner than people think. We’re faced with massive cap x cuts and plunging rig counts, as well as the inability to get capital to fund oil projects. Even with reports that the Saudis will complete the expansion of its Shaybah oilfield by the end of May raising, the Saudis' production capacity to 12 million barrels a day it is possibly going to be wiped out by falling non-OPEC output. With demand growth soaring it may be only a matter of months before the oil market finds balance.
BP Chief Executive Bob Dudley seems to agree that we are on the way to balance. Maybe not as quickly as I do, but on the road anyway. BP had a surprise beat on earnings, shocking the street with earnings of 17 cents instead of a loss that was expected. Reuters reported that the BP CEO said, “market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year.”
The oil market will also pay close attention to the next Federal Reserve meeting. The U.S. dollar has been falling giving oil a bit of support even though we heard from some fed officials that traders might be too dovish. If The Fed takes a more hawkish stance at this meeting, it is possible that the dollar will regain momentum and perhaps provide a bit of a headwind for oil.
Oil still has big geo-political risk factors as well. Continued fighting in Iraq, Nigeria and Libya could at a moments notice contain supply. Right now there is not a lot of reliable spare production capacity to meet any long term discursions. In a positive sign the government in eastern Libya exported its first cargo of crude yesterday since the country with Africa’s biggest known oil reserves split into rival power centers in the east and west according to Bloomberg News.
After the oil price crash in January it was hard to find anyone who thought that we could see rebound to current levels. It was hard to find anyone to predict that the oil traders would even be imagining debate about whether or not the market oversupply would get in balance this year. Yet one cannot underestimate the power of the markets. Low prices cure low prices and crashing prices create production destruction. In a globe that is consuming more oil with record demand for gasoline in the United States and record imports of oil into China and India, refining capacity is expanding at record levels and it is clear that we will soon need the oil that the Saudis and Iran say they will pump. Look beyond the noise. We are on the way to balance and more than likely, a global production deficit.