Despite finishing in positive territory on the day following a surprisingly upbeat US jobs report, the crude oil future’s market cratered this week suffering a weekly loss of more than 7% — the largest retreat in the commodity’s value since early February.
The massive sell-off this week was triggered by a slower than expected draw on US oil inventories with market analysts expecting a reduction of 6 million barrels, but the US Energy Information Administration (EIA) reporting that only 2.2 million barrels of reserves were dipped into in June indicating a breakdown in demand.
A full-blown collapse in oil futures was contained by continued geopolitical issues in Nigeria that reduced market expectations on the country’s production capabilities and a substantial drop off in US shale oil output due to a wave of bankruptcies in the wake of February’s market crash.
The EIA estimates that US shale oil production fell by 194,000 barrels per day last week to just 8.43 million barrels of oil daily (mb/d). If this figure proves to be reliable, it would mean that US output is down about 1.2 million barrels of oil per day from its peak in April 2015.
In Nigeria, the country’s oil minister in late June said that the country had brought oil production back from 1.4 mb/d to 1.9 mb/d with hopes to increase output to 2.2 mb/d in July matching the level that the country produced before the Niger Delta Avengers began attacks earlier this year. However, on July 6, the militants struck again blowing up several of Chevron’s truck lines placing into question the reliability of the country’s output.
Overall, world oil production remains steady near 100 mb/d exceeding demand by roughly 2% or 2 million barrels of oil each day. For frame of reference, market analysts calculate that for every 1% that supply exceeds demand, oil prices fall roughly 20-25% although the current market dislocation has already been priced in.
The market became dislocated earlier this year in the wake of China’s economic slowdown and Saudi Arabia’s vengeful oil price war wherein the Kingdom increased oil production by nearly 2 mb/d with the Crown Prince calling for an additional 1 mb/d to come on line at the worst point of the commodity crash in February.
Market analysts expected that a reduction in US supply and Nigerian political instability would help to bring supply and demand back into balance, but the fall-off in American oil demand indicated by the latest reserve figures worry analyst who believe demand may drop more than supply as the world economy begins to face headwinds.
Others hope that the retreat in oil prices may be a temporary phenomenon pointing to recent reports that Saudi Arabia’s economy may soon be entering a recession as a result of austerity measures pushed to keep the government functioning at a time when they are artificially undercutting energy markets and an unprecedented race by OPEC members to the bond markets to take on debt in order to keep social services functioning.
Overall, Brexit is expected to be only a minor issue for energy markets with analysts predicting the country’s vote to escape the European Union will only reduce global oil demand by 100,000 barrels per day over the course of the next two years.
