Stasis is a state of stability in which all forces are equal and opposing, therefore, they cancel each other out. This sums up the current condition of oil prices in one word.
The high fuel prices in 2014, approximately $100 per barrel, prompted increased production and constrained demand. The world was rapidly building oil stocks and significantly increasing shale production. Production was outstripping supply by approximately 1.5 million barrels per day bloating international inventories to an all-time high. 1
The Organization of the Petroleum Exporting Countries (OPEC) responded by encouraging members to pump oil at maximum levels, which resulted in a surplus of oil and reduced fuel prices to less than $30 per barrel. OPEC tempered high-cost production to restore balance to the supply/demand ratio. As a result, nearly 70 percent of the shale rigs stopped, but actual production dipped significantly less than anticipated. Oil producers worldwide also reduced exploration budgets by billions of dollars prompting fears that millions of barrels of oil that take years to develop won’t be available until 2020. 1
In November 2016, OPEC announced its decision to curtail nearly one million barrels per day of oil production through small production cuts from non-OPEC Russia, which took effect on January 1, 2017. Following OPEC’s announcement in November, oil prices quickly rose to nearly $5 per barrel. 1
Currently, oil prices have stagnated between $2 to $3 per barrel, dropping volatility to levels the market hasn’t seen in years. 1 OPEC was unusually successful in cutting production thanks to seasonal factors that would have cut production regardless. Even at $50 per barrel, the current rig count rebounded by nearly 300 doubling in just 10 months.2 Increased production will follow shortly.
Demand has stalled as strict efficiency gains from the high fuel prices in 2014 continue to impact demand. For now, we’ll have to see if OPEC’s cuts will prevail or whether renewed production will continue to provide a cap on prices. The answer isn’t likely to be known until 2018. Meanwhile, we remain in stasis.
Sources:
1. CME Group, 2016
2. EIA, 2017
Please Note: Although the information in this report has been obtained from sources that PTC believes to be reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. All estimates and options included in this report constitute our judgment as of the date of the report and may be subject to change without notice. PTC may, from time to time, have a position or make a market in the financial products mentioned in this report, or in derivative instruments based thereon. PTC shall not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission or error of fact. This report is confidential and is being submitted to selected recipients only. This report may not be reproduced (in whole or in part) to any other person without prior written permission of PTC.
2017 Pilot Travel Centers LLC. All Rights Reserved
