E Oil Prices Hitting Their Stride? Maybe Not


Crude oil prices seemed to have been faring well over the last month, with Brent Crude rising from around $32 a barrel to more than $40 a barrel and West Texas Intermediate going from $29 a barrel to $38.50 a barrel.

On Monday, however, U.S. oil prices slid 3% as the old uncertainty over the global supply picture came back into view.

For a while there, it seems as if U.S. oil inventories weren’t driving prices. As stored crude inventory soared to new heights in the beginning of 2016, oil prices stayed high rather than following the inverse relationship the two metrics have had historically. That’s likely because the Department of Energy has been bearish about non-OPEC output in 2016 — and oil production usually increases in the first quarter of the year anyway.

Additionally, the International Energy Agency noted in its latest monthly report that it expected non-OPEC production to drop by 750,000 barrels per day this year. That compares with a drop of 600,000 barrels per day anticipated a month earlier.

“It’s a major turning point for the IEA to acknowledge that production is going the other way,” said Phil Flynn, an account executive at Chicago brokerage Price Futures Group. “It may take years to regain that momentum.”

The case for the recent drop

Non-OPEC oil production isn’t the only part of the equation, however, and not everyone believes that enough supply cuts will occur to bring the oil market back to where it once was.

For example, Iran, who recently had sanctions lifted by the West, has no interest in a global production freeze. In fact, the latest report shows that global demand for OPEC members will exceed demand by 760,000 barrels per day.

“The chances of any production cut announcements are weak and Iran looks committed to expand oil output,” analysts at Australia & New Zealand Banking Group Ltd. said in a research note.

Saudi Arabia and non-OPEC member Russia still have plans to discuss a production freeze from OPEC members, however this likely won’t happen until Iran gets back to pre-sanction levels.

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