Oil Production Surges As Prices Look For New Lows

Crude oil traders are preparing for the delayed weekly EIA inventory report due later in the session as oil prices declined throughout the week. In the Asian session WTI gained 26 points as the US dollar eased a bit and is trading at 43.19 after falling into the $42 price range near its lowest price in 2015 as the global glut continued to grow. Russia and Iraq are turning up production levels while it is down to a few days before the UN will vote to halt sanctions against Iran opening its crude oil inventory to the world. Brent oil matched WTI oil gains to reach 46.94 well below its average trading range. With the Chinese economy slowing and global demand sluggish, oil prices are hovering around $40 per barrel.

The production of U.S. shale oil, which boosted the global supply, is still at high levels, and the Middle East continues to produce at record levels. There are many views on this lengthening period of low oil prices.

A year ago the Organization of Petroleum Exporting Countries put off cutting production with the aim of “crushing shale.” Shale producers have proven tenacious, however, intensifying their drive to become more efficient. “We recently finished a well in a record 14 days,” said a Pioneer official. “We have OPEC to thank for that.”

In July of last year, oil prices had surpassed $100 per barrel. By this August, however, that price had fallen to the high thirties. Even now the price continues to hover around $40. To cope with the drop in prices, shale producers are cutting back on investment and reducing costs. Last October, 1,609 rigs were operating across the United States. That number is down by roughly 60 percent.

Nonetheless, production levels remain high. In its October outlook, the Energy Information Administration forecasts that although U.S. oil production fell between the second and third quarter of this year, annual production will average 9.25 million barrels per day, a 6 percent increase from last year.

The excess supply in global oil markets is not due to the United States alone. Saudi Arabia, the world’s largest oil producer, is continuing to produce at record-setting levels– approximately 10 million barrels per day–and if the nuclear agreement between Iran and Western powers results in the removal of oil sanctions there, supply will increase even more. In Middle Eastern countries highly dependent on oil exports, low prices have led to fiscal burdens, and disputes within OPEC over production levels are heating up. On top of this, the Chinese economy and other emerging markets are slowing.

Trading data in Reuters showed there seemed to be shift in sentiment towards an expectation of lower oil prices, with 90,000 contracts having been sold down since the beginning of November, pulling open interest off a historic high, as traders sell out of oil.