The oil market has ‘gotten ahead of itself.’

Here’s what could drag it back down to the $40s

  • There are two forces at work in the oil market, keeping crude trading in a tight range.
  • Increased shale production weighs on the market even as OPEC shows restraint.
  • But the seasonal factor will have the biggest influence on oil prices until the end of the year.

Oil workers make a pipe connection on a drilling rig near Encinal, Texas.

Eddie Seal | Bloomberg | Getty Images
Oil workers make a pipe connection on a drilling rig near Encinal, Texas.

There are two forces at work in the oil markets today creating a tug of war. On the one hand you have U.S. shale producers on a quest to reach 10 million barrels a day in production amid falling seasonal demand. On the other hand you have the perception that the oil glut that has gripped the world over the last few years is coming to an end because of OPEC restraint and increased demand from improving economies.

These forces are keeping the oil market range bound, with crude oil prices trading between $47 and $54 per barrel.

The reality in my opinion is that while OPEC has stuck to its agreement of 2016 to limit production to 32.5 million barrels a day, oil oversupply continues. It’s true that oversupply is about half of what it was a couple of years ago, according to the Office of Economic Development, but it is still there.

Libya which is not part of the agreement continues to produce more oil than it did a year ago. It recently announced it wants to get back to 1.25 million barrels a day, or about double what it produces today.

“Production beginning to rise and demand beginning to fall is not a recipe for higher prices. I can envision oil dropping as low as $45 by mid-January.”

But the seasonal factor will have the biggest influence on oil prices until the end of the year.

Demand generally drops from October through mid-January as summer driving season ends and refineries enter turnaround stage (to get ready for next summer’s driving season.) Gasoline starts to rally around Valentine’s Day, as oil refineries gear up for summer using more oil to make gasoline.

Refineries are entering turnaround now, so you’ll see supplies build because refineries aren’t using as much oil. And while gasoline and diesel have been negatively impacted by recent hurricanes Harvey and Irma, supplies are beginning to be replenished.

Production beginning to rise and demand beginning to fall is not a recipe for higher prices. I can envision oil dropping as low as $45 by mid-January.

I do see light at the end of the tunnel. I’m looking for prices to rise in 2018 because the economy is improving and people are spending money. A durable goods report that came out last week tripled expectations, showing the economy is solid. Still, expect a couple more months of pain. The market is ahead of itself right now.

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