In the fast moving oil market much of the fundamental data only becomes available for general consumption at least one month in arrears. But EIA oil price data and Baker Hughes rig counts are available weekly and with much action going on it is worthwhile updating.
The price plunge seems to have reversed, at least for the time being (more on that below). But the most stunning data is the free fall in US oil drilling rigs shown in Figure 1, down 553 (34%) from the October top. The IEA also published their Oil Market Report early this month, on 10th February, reporting oil supplies were down 235,000 bpd in January, mainly in OPEC countries Iraq and Libya.
Figure 1 The US oil rig count is down to 1056 rigs from a peak of 1609 in October last year. The gas rig count continues to inch downwards slowly. The collapse in US shale oil drilling, that looks set to continue, must lead to US oil production decline in the months ahead.
Figure 2 The bounce in the oil price is as sharp as the crash and is difficult to see at this scale. Hence, move on to Figure 3.
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Figure 3 The low point in Brent of $45.13 was reached on 13th January. On Friday 13th February Brent closed at $61.52, up 36% in a month. Anyone who got lucky on timing investments will have made a killing.
Where there is smoke, there is usually fire. Here is the summary from the January OMR published on 10th February. Subscribers to the OMR already have the full data which may in part underpin the current rally.
Related: Why We Won't See An Oil Price Rebound Yet
So does this mean the crisis is over? I don't think so, but the price bottom might be in and recent action may mark the end of the plunge. Supply - demand differential movement needs to be of the order 2 to 4 million barrels per day to underpin a strong recovery in price and the half cycle normally takes about 18 months to work through the economy. So I'd expect prices to bump along bottom for a few months, perhaps testing recent lows before the long climb back begins.
It looks as though the US shale oil industry is falling on its face. This will inevitably lead to a fall in US production and that country dipping more deeply once again into international markets. This will be the main driver for a full oil price recovery. But what then? The oil industry needs a stable price environment to make long term and very large investment decisions. If higher price sends the shale drillers back into business then this will surely lead to another collapse. For many years The Texas Railroad Commission controlled Texas oil production providing price stability a role subsequently assumed by OPEC and Saudi Arabia who for many years exercised that control with great skill to the benefit of all. The oil industry, a raw symbol of capitalism, may have to accept that it cannot survive in a free market environment. It hasn't done so in the past.
By Euan Mearns of http://euanmearns.com/
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"Euan Mearns is a geologist and geochemist. In recent years he was a principal at The Oil Drum, the worlds leading energy blog, until it… More