Crude oil still faces a difficult market with prices being hurt by a continuing supply imbalance, as reported last quarter. Reporting by the US Energy Information Agency (EIA) forecasts total global consumption at 93.30MB/D, which is well exceeded by supply at 95.24MB/D. It is clear that global supply is still outstripping demand and this can only lead to further declines in global crude oil prices.
As a result of the supply imbalance, there have been calls by various OPEC members to reduce production to help support prices in the long run. However, OPEC has rejected the calls and instead stands firmly behind a strategy of driving producers with a higher cost basis out of the market. Considering the current level of rig stand downs and well shuttering in the US domestic oil industry, it’s likely that OPEC’s long-term strategy is working by driving down US oil production and CAPEX.
In response to declining prices, US rig stand-downs have been rapid and domestic production has been significantly affected. Subsequently, the US Crude Oil Inventory figures have shown significant draws from stockpiles throughout the latter part of the quarter. US crude oil inventories figures showed significant declines on 9 of 13 reporting events. Despite constant reduction in the crude stockpile, the commodity still faces an uphill battle as OPEC seeks to maintain price below the key $65.00 per barrel level. Taking a long term view, the commodity is forecast to face bearish pressure to the $53-58 price level throughout 2015.
Foreign CAPEX for Iran on the Table
As the diplomatic situation in Iran continues to stabilise, foreign oil conglomerates look to secure strategic partnerships with the regional power. CNBC has reported that executives from Royal Dutch Shell (LONDON:RDSa) and ENI (NYSE:E) have met with Iranian officials to discuss the potential for investment into Iran’s aging oil production supply chain. Iran is the elephant in the room, as far as proven crude oil reserves are concerned, as the country boasts the third largest deposits in the world of the critical commodity. However, their supply chain has lacked investment and infrastructure upgrades for some time, so any move to improve their productivity could see additional supply flow into the world markets.
Iran currently produces approximately 2.7MB/D of high quality crude oil, but additional CAPEX could provide a significant boost to production In fact, some economists see foreign investment as boosting Iranian production to 4.4MB/D by 2025. Foreign investment appears increasingly likely, as the Iranian regime nears a deal on their nuclear programs, which is likely to add more pressure to the current global supply imbalance.
Technical Analysis
The double bottom structure that looked to be forming on the crude oil chart in the last report played out with a break over the neck line at the $55.00 mark. However, this failed to ignite the market and a bullish trend did not eventuate. Volatility dried up and the long wicks on the weekly candles suggest a struggle between the bulls and the bears for control, which has resulted in a consolidative pennant shape. We will be watching this market for a close either side of the shape, which could indicate longer term direction.
