Is it really possible that we could see oil drop back into the low $30 range? – absolutely! While the mainstream media is all abuzz about yet another potential OPEC production freeze, supply continues to outpace demand. Even if OPEC were to agree to a freeze, which is unlikely, they are talking about a freeze at the July level, which happen to be at all-time record-high levels.
The countries that are calling for a freeze, such as Venezuela, Angola, Algeria etc, are the ones that for a variety of reasons, are maxed out, they cannot raise production beyond their current capacity. Venezuela for example, has seen a drop in production, as it cannot afford the diluent to mix with its heavy crude to produce exportable product.
Countries that can raise production, such as Iran, Iraq, & Saudi Arabia, have no interest in capping production, as they are in desperate need of the cash generated from oil production. In Iran’s case, they have been playing catch-up ever since the lifting of US sanctions against them, and they have no intention of freezing until they feel they are back to where they want to be with their oil exports, most likely around the 4 mb/d level.
This summer’s ‘driving season’ was late getting started, and yesterday’s data from the EIA showed that gasoline supplies were flat for the week, far higher than the expected decrease in inventories. US domestic crude supplies rose by 2.5 million barrels in the week ended Aug. 19th, which was significantly above the 200,000 barrel climb expected by analysts polled.
There are only two weeks left in the seasonally strong ‘driving season’, and after the Labour Day weekend, we can expect demand to drop by up to 1.5 million barrels per day, as the glut of oil will start building again, which should drive the price of crude significantly lower. Bottom line is, there is simply more oil being produced than is being consumed.
To add to the supply problem, for the eighth straight week, we have seen the US rig count rise. Technology has dramatically increased US shale production efficiencies, and many of these producers are now able to eke out a small profit at the low $40 range.
In the near-term, as US production looks to rise, and with driving season coming to an end, there will be real pressure on oil prices, unless there is a ‘real’ OPEC production freeze, at much lower than current levels. Add to these issues, our models are forecasting another leg up for the $US, which will be another headwind for oil prices.
Tomorrow we have the much anticipated speech by US Federal Reserve chair Janet Yellen. As always, this speech will be dissected into tiny pieces as the mainstream media will look to fill up the airwaves with their view on whether we get a September rate hike. We will no doubt see whip saw action, with each word that comes out of Yellen’s mouth.
If they hint at delaying a rate hike, then the equity markets, and commodities will move higher, while the $US will dip, at least until the next hint from the Fed as the September Fed meeting approaches
Aside from these Fed events, and/or a geopolitical event, our models are forecasting that over supply will drive oil prices lower, likely below $40, perhaps to the low $30 level. If we get a European banking crisis, which is certainly possible, then oil could hit new lows. In the very short-term, watch the $46 support level, and then the Near-term Support at $40-$46.