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4 Must-Know Reasons Why This Oil Rally Won’t Last

By Ellen R. Wald, Ph.D.CommoditiesMay 03, 2016 06:43AM ET
www.investing.com/analysis/4-reasons-why-this-oil-rally-won%E2%80%99t-last-200127468
4 Must-Know Reasons Why This Oil Rally Won’t Last
By Ellen R. Wald, Ph.D.   |  May 03, 2016 06:43AM ET
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The price of oil reached a new 2016 high last week - $46. Oil’s steady climb over the past few weeks, coupled with small but continual reductions in U.S. production, has many seeing the light at the end of the tunnel and expecting prices to continue to rise.

However, there are many reasons to doubt the strength and foundation of this oil rally:

1) Rising OPEC Production

At the OPEC/Non-OPEC producers meeting held in Doha, Qatar last month, participants failed to agree on a production ceiling (or freeze). Since then, OPEC production has grown to 32.64 million barrels per day during April. As the hot summer months approach, Saudi Arabia, Kuwait, and other Persian Gulf countries will have to increase their output to meet domestic electricity demand and to continue exporting at current rates. This could lead to historically high production levels over the summer.

2) Slowing Chinese Oil Production

Although China is a net oil importer, the country does produce a significant amount of domestically used crude oil. Indications are that Chinese oil production is declining, which will mean that unless demand also falls, China will be looking to import more oil in the future. China’s major partners are Saudi Arabia, Russia, Kuwait, and Iraq – all of whom are eager to expand their markets in China. Iran is another possible source of oil for China, although the Iranian oil industry is coming back online slowly. When major players like OPEC countries or Russia produce more, the global markets take notice much more so than if China decreases production.

3) Persistence of the Global Oil Glut

Crude oil stockpiles remain at some of the highest recorded levels. The Wall Street Journal reported that 370 million barrels have been put in storage since January 2014. Even with gasoline demand in the United States expected to grow this summer, crude storage levels are so high that it will not be enough to alleviate the glut. Even though oil production in the United States is declining, that decline is not nearly enough to compensate for increases in production elsewhere. For example, U.S. production has been “reducing output by 300,000 barrels since the beginning of the year,” while OPEC production is higher by 30 million barrels per day, just in the month of April. To really make a difference in the global oil glut, American production would have to decline much more significantly.

4) Tenuous U.S. Oil Production

Since December 2014, U.S. crude production has proven remarkably elastic. Part of this has been producers’ ability to cut costs and drill more efficiency, but even more important is the propensity of lenders to keep the lines of credit open. Some of the weaker producers are going bankrupt or selling off assets, but many small shale oil producers are still struggling along. The problem is that the closer oil gets to $50 a barrel, the more likely producers are to open nearly completed wells and produce more oil. Growing U.S. production could, in turn, send prices into a nosedive.

Oil is not likely to head back down into the $25-$30 range, but neither are prices in the $50-$60 appropriate at this point. Perhaps if more lenders revoke credit lines for more U.S. producers or an environmental or geopolitical incident takes out production in some major producing country, oil could temporarily surge. But absent a serious shock to the market. this oil rally is not likely to hold.

4 Must-Know Reasons Why This Oil Rally Won’t Last
 

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4 Must-Know Reasons Why This Oil Rally Won’t Last

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Not Important
Not Important May 05, 2016 1:53PM ET
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"Part of this has been producers’ ability to cut costs and drill more efficiency, ... The problem is that the closer oil gets to $50 a barrel, the more likely producers are to open nearly completed wells and produce more oil. Growing U.S. production could, in turn, send prices into a nosedive."..What a big load of wannabe prediction! There is no chance in *****that the US will grow its production unless the prices skyrockets. The big producers are in big money trouble and there are no investors or banks putting fresh money into these companies. That means that rig counts will continue to fall and production increase will be impossible. If the production is plummeting with todays rig count how will it go when there are getting fewer and fewer rigs in action. We would need a serious increase in rig count to see increase in production. And I am not talking about 10-20-50 but in the several 100s figures. That is FAR away from happening.
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Not Important May 05, 2016 1:51PM ET
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"... enough to compensate for increases in production elsewhere. For example, U.S. production has been “reducing output by 300,000 barrels since the beginning of the year,” while OPEC production is higher by 30 million barrels per day, just in the month of April. To really make a difference in the global oil glut, American production would have to decline much more significantly."..Did you know that the reason US production is still holding up is because of new production coming online in the gulf of Mexico? They have added 5-600 000 bpd of production in the gulf the last 2 years. So the shale decline is BIG!!! A lot bigger than most people would understand. If you add to this that maybe 4 mill barrels of US production is shale production then you know how the US production figures are going in the future. Let me give you a hint. A straight drop!
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Not Important May 05, 2016 1:49PM ET
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"Although China is a net oil importer, the country does produce a significant amount of domestically used crude oil. Indications are that Chinese oil production is declining, which will mean that unless demand also falls, China will be looking to import more oil in the future. China’s major partners are Saudi Arabia, Russia, Kuwait, and Iraq – all of whom are eager to expand their markets in China. Iran is another possible source of oil for China, although the Iranian oil industry is coming back online slowly. When major players like OPEC countries or Russia produce more, the global markets take notice much more so than if China decreases production."..Since when would lower domestic production and increased imports be bad for oil prices? That just does not make any sense at all. China have increased their imports by 1,1mill bpd only from the teapot producers. They are also continuing to build up their strategic reserves. All of this is supportive for the oil price!
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Yellow Drill
Yellow Drill May 04, 2016 7:44PM ET
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Good read.The $50 limit is Level to look out for.I Enjoyed it.
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Casey Poole
CaseybPoole May 04, 2016 2:29PM ET
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PLEASE WRITE once a day for the next month, you are the only TRUE BLUE REALIST in the whole sector, reporting FACTS however unpopular they may be. Just a few short months back you're words published; directly helped push OIL down, KEEP UP THE GOOD WORK!
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Chris Handke
Chris Handke May 03, 2016 12:11PM ET
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Are you sure you have a PhD? There are several points in here that are both blatantly wrong and illogical. Blantantly wrong: OPEC has not increased production 30 million bopd in April. Not even close. Illogical: Declining Chinese oil production does not support lower oil prices, it would clearly be the opposite. On top of that this is very superficial analysis. Which OPEC nations are capable of increasing production right now? Certainly Iran and maybe a few others but there are also several members whose production will be falling due to a lack of investment in new infrastructure. Russia is in the same boat and we should see their production start falling soon. Your analysis is beyond worthless and I am disappointed that https://investing.com didn't take the time to realize this before posting it.
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Meir Teichner
Meir Teichner May 03, 2016 12:11PM ET
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Agree with the post of Chris
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Casey Poole
CaseybPoole May 03, 2016 12:11PM ET
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youre argument is mirco thinking, declining demand, with record supplies, will cause the "bubble", then stabilization.... RECORD LEVELS HIT JUST LAST MONTH W/ IRAN not in full swing US all but out, and KUWAIT strikes, THE GLUT IS REAL, Read the facts not your 'f'ullish hopes on making millions off Black Gold. You want that today is the day to move to the real $$$$ GOLD and the miners my friend.....
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Yellow Drill
Yellow Drill May 03, 2016 12:11PM ET
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When you said Gold...A Day when Gold drops..the reason if when it does is when you would BUY.So Much for Buliish Moves :-)
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Casey Poole
CaseybPoole May 03, 2016 12:11PM ET
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better believe i loaded up haas.
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