The Six Reasons Why WTI Could Revisit The Twenty-Dollar Handle

This is the first in a series of posts looking at issues that affect oil price and what might lead to a price collapse in 2017.  At the time of this writing, WTI closed the week of 1/27/2017 at 52.74 up 87% from the February 2016 lows.  The market has looked to OPEC for guidance and proof of production reductions to support the recent price increases without significant production cuts new oil will continue to compete with over 170 million barrels of excess inventory.

Here is the list of the six items that could cause serious issues for an oil price rally;

  1. Inventory levels
  2. Global demand
  3. Shale productivity gains & the DUC Inventory
  4. The new administration in the US
  5. Average historical oil price
  6. OPEC history of overproduction

Can oil sustain the price increases that have manifested since OPEC’s commitment to reduce production?  This post will cover the first and most significant issue facing the commodity, that being excess inventory.

Below is a Gif several charts comparing WTI price against inventory levels.

At Unconventional Insights, we have been monitoring the US Crude inventory on a weekly basis.  In late 2015 the weekly and thirteen-week moving average broke out from the 52 meek moving average.  This inventory build peaked in April 2016 at 512 million barrels and has since leveled off just below 500 million barrels of oil in inventory.  This build caused price to deteriorate to a low of  $28.14.

 

Current inventory sits at 494 million barrels 170 million barrels above the historical average and four times the standard deviation for US inventory variation.

OPEC members commitment to reduce production has been a catalyst for an oil price to increase.  This rally is fragile given where inventories sit today and the premise that there will be an orchestrated supply reduction.  Without OPEC participation or if shale producers back fill OPEC reductions with supply then it will be difficult for the rally to sustain.

You will see in the higher resolution chart that weekly production has increased again.  We are observing this chart to see if the 13 week breaks above the 52-week again and if momentum develops validating that there is no true willingness to cut production in the face of improved price.

 

The next post will cover global demand reductions and how this puts further pressure on supply cuts to alleviate the inventory build.

 

 

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