Crude oil wasn’t invited to the big party on Wall Street this month.
Not long ago, oil prices looked poised to fly back above the $60 mark. All of a sudden now, the next stop looks more like $40 a barrel.
So why is oil in a downdraft? Oil traders, as they’re known to do, got a tad too excited about the long-awaited rebalancing of the market.
The world still seems to have more oil than it needs — and the epic supply glut has even spread into gasoline. Gasoline inventories are sitting at the highest levels ever for this time of the year, despite the fact that it’s the heart of summer driving season.
“Once again, the markets got ahead of themselves,” said Matt Smith, director of commodity research at ClipperData.
During the march to $50 oil, the shaky fundamentals of the market were masked by outages in Nigeria and Canada’s massive wildfire in early May. Now that production has rebounded in both places, and other countries like Libya attempt a comeback, the supply problem has re-emerged.
The other big problem is that $50 oil only emboldened struggling U.S. oil companies to start drilling again. The closely-watched Baker Hughes count of U.S. oil rigs is up seven of the last eight weeks.
That, of course, won’t help the oversupply problem. In fact, it’ll only make things worse.
“All of these guys are trying to get their money out of the ground. Anybody involved in oil is trying to produce as much as possible,” said John LaForge, head of real asset strategy at the Wells Fargo Investment Institute.
That’s why the U.S. oil boom has withstood the crude crash better than most had figured it would. U.S. oil production is down seven straight months through April to the slowest pace in nearly two years. But American output hasn’t fallen off a cliff, despite the relentless price war with OPEC.
ClipperData thinks U.S. oil production will actually bottom out in August, before gradually rising the rest of the year. Goldman Sachs is also calling for domestic oil output to rise next year.
“U.S. production isn’t dropping strongly enough to balance the market,” said ClipperData’s Smith. He added that he thinks oil prices are likely to go back to the $40 level.
Credit: CNN Money