February 10, 2018, by Daniel King
Those analysts & industry experts who warned that oil prices can’t go on rising forever now have the chance to tell everyone else “I told you so.” Brent and WTI have fallen by 9 percent since the highs they hit in late January, with the international benchmark slumping to US$64.42 Feb 9th in midday Asian trading, and WTI falling to US$60.61 a barrel.
The problem with bubbles is sooner or later every bubble pops. Sometimes the bang can be spectacular, which is what happened four years ago. This time it was quite loud, too.
Many energy experts warned at the end of January that there is a “tremendous speculative bubble.” They warned that the price is due for a serious correction. Reuters’ John Kemp noted that bullish bets on Brent, WTI, and the four most popular oil product futures are at all-time highs, which also suggests a correction is pending.
Now, the correction is taking place. It may have started with the stock market slip on Feb 5th, prompted by higher bond yields, but it continued with the Energy Information Administration reporting that the United States have breached the 10-million-bpd oil production threshold for the second time since last November—and apparently much earlier than most observers expected.
U.S. drillers produced 10.25 million barrels of oil daily last week, the EIA said in its weekly petroleum report, and prices slumped further as doubts about the global oversupply—which is still lingering—were reignited. But the weekly report was just additional kindling to EIA’s latest Short-Term Energy Outlook, which forecast that U.S. oil production will top 11 million bpd in 2019.
With so many signs that U.S. drillers are not quitting production growth, a selloff was only to be expected. Some highly disappointing numbers from a few oil majors may have made things worse, too. ExxonMobil and Chevron, in particular, spooked investors when they revealed fourth-quarter earnings that badly missed expectations. In an already jittery market such as the one for oil, such misses could sometimes outweigh the robust results of all those who beat forecasts, and they were the majority this reporting season.
It is also telling that the latest outage of the Forties pipeline in Europe did not have a positive impact on prices, which would have been the normal thing. When the Forties system was shut down in December, prices got a major boost thanks to the fact that the Forties transports more than 400,000 bpd of crude to the UK. Now it’s down again, but prices have not reacted in the normal way. In fact, some analysts warn that prices have yet to fall further. The driver this time will be the US Fed’s plans for at least three rate hikes this year.
Adding insult to injury, Iran’s Energy Minister earlier this week said the country has the capacity to boost production by 100,000 bpd within five to six days of an end to the production cut deal. Now, while Bijan Zanganeh was likely speaking hypothetically, he also said that he sees no reason for OPEC to extend the cuts beyond June this year.
Some cautious investors started exiting their long positions ahead of the bubble’s burst. Their numbers are likely to swell in the coming weeks, despite investment banks’ optimistic price forecast revisions for Brent and WTI, unless short memory once again plays its trick on the market and another bubble rises from the remains of the last one.