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After Last Week's Oil Plunge, Can Prices Recover?

By Ellen R. Wald, Ph.D.CommoditiesMay 10, 2017 02:35AM ET
www.investing.com/analysis/the-4-real-culprits-behind-oil's-recent-price-plunge-200188168
After Last Week's Oil Plunge, Can Prices Recover?
By Ellen R. Wald, Ph.D.   |  May 10, 2017 02:35AM ET
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When oil futures dropped 5% last Thursday, analysts were quick to blame OPEC for production cuts that have, over the past four months, failed to resolve the oil glut. But the real culprits are as follows:

1. As a result of the OPEC and non-OPEC production cuts deal, financial institutions and hedge funds anticipated that global crude oil inventories would draw down more quickly than they have. When their predictions were wrong, they were disillusioned, leading to a drop in oil prices.

2. Shale oil production did not immediately rebound when the OPEC-non-OPEC production cuts began. However, over the past two months, more DUCs (drilled uncompleted wells) were quickly completed and put into production in the more profitable shale oil areas. This production jump is showing up now and putting downward pressure on the oil market. The shale oil industry currently has more potential to increase production than the conventional oil industry, but it will soon face the weight of increased service and production costs.

3. Gasoline demand in the U.S. has not risen as much as is usual for this time of year. According to the EIA, gasoline consumption is 250,000 bpd lower now than it was at this time last year. On the other hand, since oil prices fell last week, gasoline prices have since fallen. With the summer driving season approaching, U.S. drivers may soon start filling up. If they do not, it will continue to depress oil prices.

4. Speculator panic resulted in 520 million barrels of crude oil options traded on Thursday. This was the third most ever. Over 7,000 contracts a minute were traded during a time of day when usually only a few hundred change hands. The sudden volume of trade was amplified by speculators and helped exacerbate the sudden drop.

What now? All eyes are on OPEC and its non-OPEC producing friends to shore up prices with talk of extending the production cut agreement for the rest of the year. In fact, Saudi Arabia is leading the jawboning with calls for extending the agreement beyond 2017. Since last week’s sudden drop, oil prices have not rebounded. Instead, they have continued to bounce.

News at the end of April from the equity markets that the oil majors – including ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) – beat expected quarterly earnings was a false sign of success. Exxon recovered after writing down assets the previous quarter and Chevron has been helped by selling less productive assets. Much of the profit jumps came from cost cutting and unloading assets, which could hurt oil companies in years to come and do not signal, as was reported, a turn-around in the oil market.

Key factors to look at include summer gasoline demand in the U.S., summer electricity demand in the Persian Gulf, shale oil production costs, offshore production in the Gulf of Mexico and Brazilian pre-salt regions, and most significantly, Venezuelan political unrest. These factors, more so than this month’s OPEC meeting, could have the greatest impact on oil prices over the next six months.

After Last Week's Oil Plunge, Can Prices Recover?
 

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After Last Week's Oil Plunge, Can Prices Recover?

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Timochin Khan
Timochin Khan May 10, 2017 9:41AM ET
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As always, you are great, well done...Thank you....
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Ashwin Sh
Ashwin Sh May 10, 2017 6:14AM ET
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Another LONG-TERM *****came from WARREN BUFFET when he commented that COAL is never going to make a comeback. That's bad news for all the conventional Energies.
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Mario Fernandes
Mario Fernandes May 10, 2017 5:16AM ET
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Dear Ellen,.I'm following you and would like to congratulate your work. Your articles are well structured and instructive. Thanks.
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