The price of West Texas Intermediate (WTI) finally found the bottom in February for this oil price cycle. It won’t be straight up from here, but with global supply & demand heading toward a balance by yearend, we should see higher oil prices.
Later this week, the International Energy Agency (IEA) will publish their monthly Oil Market Report. In their April report, IEA forecast an increase in demand for hydrocarbon based liquid fuels (primarily made from crude oil) of 1,800,000 million barrels per day from the first quarter to the third quarter of this year. If that happens, the global oil market will be back in balance.
On April 25th, Terry Starling from Raymond James presented his firm’s official oil price forecast for 2016 and 2017. Like IEA, Raymond James predicts a significant tightening of the oil market this summer. They believe WTI will reach $50/bbl. by the end of June and spike to $70/bbl. in late 3rd quarter.
For over a year, crude oil prices under $60/bbl. are unsustainable. We’ve seen an incredible decline in drilling activity that is going to result in an acceleration of Non-OPEC oil production declines that began a year ago. The number of rigs operating in North America is now at the lowest level since Baker Hughes (BHI) started tracking it over 70 years ago.
Keep in mind that the United States and Canada are not the only two countries where oil production has rolled over. Oil production in Venezuela was down 188,000 barrels per day year-over-year in the first quarter due to natural declines and an economic crisis (caused by low oil prices). Latin America on the whole lost 441,000 barrels per day in the first quarter. We’ve seen many deepwater projects cancelled, enough to all but guarantee an oil shortage in 2018.