American Oil and Gas Reporter - May 2015 - 29

MARKETMATTERS
Back And Forth
Oil Market Confounds
Industry Analysts
Imponderables surrounding the changing face of energy independence have drawn the focus of the U.S. Energy Information Administration, which noted that advanced technologies "are
reshaping the U.S. energy economy." There has been growth in
the production of both crude oil and natural gas. There has been
growth in using renewable fuels. There have been improvements
in demand efficiencies as well.
Taken together, these changes in the energy industries could
effectively eliminate net energy imports sometime past 2020, according to EIA. The agency says, "The United States has been a
net importer of energy since the 1950s. In cases with the highest supply and lowest demand outlooks, the United States becomes
a significant net exporter of energy."
Only where domestic supply is lower and demand is higher
would the United States remain a significant net importer of energy.
In view of the country's emerging energy self-reliance, the unusual situation in the oil markets-where supply continues to grow,
global demand is lackluster, but price does not move lower-continues to frustrate analysis. We doubt the economic laws of supply and demand have been repealed, but counterintuitively, recent gains in supply have been accompanied by rising prices. West
Texas Intermediate crude oil prices bottomed at $42.03 on March
18-the date EIA released March 13 supply data. Prices then rallied to $56.69 on April 15.
There was a twist with the release of petroleum supply data
from April 3 that mirrored previous reports. Crude oil added 10.9
million barrels to stocks. An important difference, however, was
the reaction of price. WTI crude oil, basis May, lost $3.56 at the
April 8 close-the largest single-day drop this year and the first
time the market reacted negatively to the inventory on the day of
data release since March 11. The weekly storage gain was the
largest one-week increase since March 2001. Moreover, the weekly gain was the third 10 million-plus weekly increase this year.
The price decline may have reflected WTI's technical condition, which was overbought, calling for some degree of rebalancing.
In addition, refiners had more than 30 days of crude oil supply
available-a number not seen since 1984.
But the price drop was not to last. Inventory data released on
April 15 added 1.2 million barrels to already bloated balances.
Commercial crude oil inventories in the United States reached
483.7 million barrels during the week ending April 10. This was
an increase of more than100 million barrels since the beginning
of the year, a supply expansion of 26.6 percent. By any measure,
there is a lot of crude oil around.
The crude oil market may be ready to retrace the recent rally, but some caution is in order. Refinery turnarounds may be ending as utilization has risen to more than 90 percent of capacity.
Activity at this level could eat into stocks rapidly. Moreover, demand for petroleum products continues at 19 million barrels a day.
Transactions in securities futures, commodity and index futures, and options carry a degree of risk. Past
performance may not be indicative of future results. This column is for informational purposes only. It does
not represent an investment offer, solicitation or recommendation.

" Prices have moved more than
2 percent up or down

on 42 trading days this year.

Round number support can be found at $50.00 a barrel; lower support is at $47.50.
Early April supply data thrust prices over resistance, increasing
the market's volatility. According to press reports, as of April
14, "prices have moved more than 2 percent up or down on 42
trading days this year, more than the total number of such moves
in any of the past three years."
Inconsistent market action has challenged the analytical
community. Few are calling for a return to $90-plus crude oil prices
(although a change in policy by Saudi Arabia could change that
view).
Changes in the ways crude oil producers are dealing with price
uncertainty could put a cap on price advances. Some analysts are
suggesting a crude oil price of $65 would be enough to cover costs.
As prices rise, producers could hedge and limit further price advances by selling effectively.
The industry has to deal with continued high levels of output,
even with lackluster demand growth. Some are expecting a production slowdown if prices remain low, reflected in a lowering
rig count and sharp cuts to capital spending. Analysts believe domestic output could top out in June, anticipating the next burst
of production activity perhaps could come in 2016.
Ì

ALAN H. LEVINE is chairman
and chief executive officer of
Powerhouse, a registered affiliate
of Coquest Inc., and a commodities
brokerage offering hedging services to the energy industries.
Levine has more than four
decades of experience as a petroleum specialist. He may be
reached at alan@powerhouseTL.com or 202-333-5380.

MAY 2015 29

American Oil and Gas Reporter - May 2015

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