For much of 2017, oil markets had seemed abnormally calm. Sure, prices gyrated up and down every trading day. But the moves were never very substantial. Between Jan. 18 and last Wednesday, benchmark West Texas Intermediate crude never closed lower than $51.08 per barrel, and never higher than $54.45 per barrel. Then, in a span of a few days last week, WTI dropped to about $48 per barrel.
What happened? And what happens next?
First, recall that OPEC surprised oil markets (and me) last November when the cartel agreed to cut back its collective oil production to reduce excess supply and push prices higher. WTI, which had been trading in the mid-$40s, quickly jumped to the low-$50s as traders bet on tighter markets and higher prices.
OPEC appears to be making good on its pledge to reduce output. And several non-OPEC members that joined the cartel are cutting back, too. But OPEC’s market heft isn’t what it used to be. The price bump its cuts sparked also galvanized drilling activity in the U.S. The number of rigs actively drilling for American oil had already started climbing last summer after a long slide. The pickup accelerated when crude prices suddenly crested $50 per barrel late in the year.
All those new wells getting drilled are translating into more production, undercutting OPEC’s bid to take barrels off the global oil market. After bottoming out at about 8.6 million barrels per day last September, U.S. output is now back at 9 million b/d, according to the Department of Energy’s latest weekly estimates. And with drilling activity still ramping up, production is a good bet to keep growing in coming weeks and months.
The end result: Crude oil is still piling up in storage in the U.S. In fact, stockpiles hit another new record high just last week. Suddenly, it seems that OPEC’s plan to tighten supply isn’t working, at least here in the world’s largest oil-consuming nation.
So perhaps the market was ripe for a tumble. Stephen Schork, editor of energy investing newsletter The Schork Report, notes in an interview that “Wall Street is very long [in] this market,” with bullish bets on oil futures outnumbering bearish positions by a huge 11-to-1 ratio. Given that lopsided outlook, it’s not surprising that the recent data showing a continuing supply glut might prompt a sell-off. Schork thinks that WTI could slip to $45 per barrel or so before rebounding later this spring, when U.S. drivers take to the roads for vacations and refineries boost their oil buying to meet rising gasoline demand.
A price rebound seems like a good bet. Just don’t wager on a big rally. Schork is looking for a return to the mid- to high-$50s per barrel late this spring, after seasonal demand perks up. Meanwhile, however, U.S. oil output should continue to grow, putting pressure on OPEC to keep a lid on its own output. That puts the cartel in a quandary: Stick to its production cuts and lose market share to U.S. energy firms that are pumping more oil. Or open the taps again to defend market share, and push prices down in the process. Not an enviable position to be in.