Oil Price Rebound May Be Months Away

Crude oil was flat in the morning session after gaining late in the trading day on Wednesday. WTI is trading at 43.27 after the release of the weekly EIA inventory. Brent oil is also steady at 50.22 paying little attention to the surge in OPEC production.  Oil ended up on Wednesday as a weaker dollar and lower US crude stockpiles provided a modest bounce off six-year lows hit the previous session, when worries about China’s plummeting currency and economic slowdown deflated prices.

Concerns that US inventories could build again from higher crude imports and refinery outages kept a lid on the rebound. Crude stockpiles in the United States fell by 1.7 million barrels last week, just short of market expectations for a draw of 1.8 million barrels, government data showed. Gasoline inventories also fell, by 1.3 million barrels versus the 647,000 barrels forecast.

Oil production from non-OPEC countries is set to slow dramatically next year and slip into its first contraction since 2008, the International Energy Agency said Wednesday in its monthly oil market report. And the IEA said the U.S. will be the hardest hit, as more oil producers rethink their priorities and cut production. OPEC, the 12 nation cartel led by Saudi Arabia, has embarked on a fierce battle over its market share last November. It refused to cut output in the light of lower prices, hoping instead to squeeze its rivals with higher production costs out of the market. Resilience from the U.S., Russia, and other non-OPEC countries has led to the biggest oil glut in 17 years.

“While some producers might be successful in lifting output in the short-run, we expect the majority will struggle to sustain higher rates over longer periods due to steep spending curbs,” the report said. The IEA monitors energy market trends for the world’s richest nations.

The U.S. drilling activity is already down steeply from the October 2014 peak; 59% fewer rigs were operating at the end of July. Oil hit a six-year low of $43.08 a barrel on Tuesday, dimming hopes for a significant uptick in activity any time soon.

A number of factors — ranging from a fight for market share raging between Opec and some non-Opec cartel producers, fields in southern Iraq pumping out more oil, and now the prospects for a quiet hurricane season later this summer that will keep rigs working around the clock in the Gulf of Mexico — have all acted to keep oil prices low.

In recent days, an apparent economic slowdown in China, one of the world’s top two energy consumers, that led to the devaluation of its currency, have come into play. Day, weeks or months may yet pass before a recovery in prices takes hold and there is a potential for oil prices to fall to a floor of $45 a barrel. Predictions for a quiet hurricane season in the US mean production may not be disrupted this year. Longer term, the fundamentals of the world economy are significantly healthier than back in 2008 and prices are likely to firm as a result.

The International Energy Agency yesterday said the global oil glut will last through 2016 as the strongest demand growth in five years and faltering supply fail to clear the surplus. Stockpiles won’t be diminished until the fourth quarter of next year, or even later if sanctions on Iranian crude are lifted, the agency said.