Oil has dropped about 13% since its high of $51.67 in early June. On Friday NYMEX September crude fell 56 cents at $44.19/b. ICE September Brent settled down 51 cents at $45.69/b. The US Dollar Index reached 97.5 Friday, its highest level since March 10. A stronger dollar makes fuel imports more expensive for holders of other currencies. The Brexit vote raised concerns about European economic strength.
My last report on oil occurred in early June as futures prices broke the $50 mark for the first time in a rally driven by a US decrease in production and a weakening dollar. I claimed that it was highly unlikely for oil to rise to $60 because of three reasons: Middle Eastern production, temporary outages, and the Bullwhip Effect. Saudi Arabia, who is very capable of operating in a low price scenario, showed no signs of slowing down and Iran is determined to rapidly ramp up their production. Nigeria and Canada’s outages helped spark a rise in oil prices, but the effect of those short-term catastrophes is waning. All eyes have been on US production, gasoline inventories and demand, and the overall economic outlook. And sure enough as oil prices rose US energy companies eagerly watched the futures ticker, salivating over the idea of $60/b. Cautiously optimistic, production has continued to decrease, but the opposite is true for active rigs revealing that US companies are more adept at operating in a low-cost environment and are tempted to revamp operations.
Nigeria and Canada
The outlook for these two past market movers is split. The Nigerian oil industry risks sinking deeper into crisis in the months ahead with more disruptions to oil output and exports as the government’s dialogue with militant groups has failed to curb violence in the Niger Delta. Some 700,000 b/d of Nigerian oil output is currently shut-in due to the latest wave of attacks on pipelines and other production facilities in the Niger Delta region, the state oil firm NNPC said Thursday, taking production to around 1.5 million b/d. Nigerian officials hope that production will normalize soon but these seems increasingly unlikely.
Canadian companies are slowly showing signs of life after the wildfires that plagued multiple oil sites abated. The number of oil and natural gas wells drilled in the second quarter of 2016 in Canada fell 58% but there are some signs of resurrection. Three leading oil sands producers — Cenovus Energy, Canadian Natural Resources and a joint venture between ConocoPhillips and Total E&P Canada — have remained on track to add a combined raw bitumen production capacity of over 300,000 b/d by late 2017. Drilling activity is also expected to be maintained in the Montney and Duvernay. According to the CEO of Canadian drilling company Precision “We have started off [Q3] with 29 rigs each in Canada and the US and our hope will be for the rig fleets to remain in service. With a few more dollars of increase in [the] oil price, we will move up nicely, and in the WTI $60/b to $65/b range, we can expect all our 200 rigs to be contracted”.
US Production
Falling US crude production and inventories have offered support for the market despite the recent drop below $50.
The July Short-Term Energy Outlook (STEO) forecasts crude oil production from the Lower 48 states to continue to decline through the rest of 2016, then level off in the first and second quarters of 2017. This production forecast is predicated on the WTI price forecast in STEO, which rises from an average of $47/b in third-quarter 2016 to an average of $50/b 
in second-quarter 2017. Crude inventories fell 2.34 MMbbl last week, according to the Energy Information Administration.
Despite decreasing production drilling rigs targeting crude in the U.S. rose by 14 to 371, after 27 were added since the start of the month, Baker Hughes Inc. said on its website Friday. While declines from existing wells are expected to result in a net decrease in production, increased drilling and higher well productivity are expected to soften the decline. The new-well oil production per rig through July 2016 averaged 796 b/d in the Bakken region (within the Williston Basin), 983 b/d in the Eagle Ford, and 470 b/d in the Permian, according to EIA’s latest Drilling Productivity Report.
Also US gasoline inventories stood at 241 million barrels the week ended July 15, a 12.1% surplus to the five-year average for the same time of year, according to Energy Information Administration data.
So What Does All of This Mean?
US data remained the key driver in oil prices for the past month or so. The lower production provided optimism for both investors and companies alike. The ambiance surrounding the black-gold elites improved to be less depressing and more forward-looking. Halliburton CEO Dave Lesar said Wednesday, “Today our customers are thinking about growing their business again rather than being focused on survival.” It only seems logical that while US production helped ignite the rally, any signs of weakness or supply gluts will drastically lower prices. Ceterus Paribus, in a best case scenario, with Russia, Iran, Nigeria, and Canada’s storages remaining the same then that leaves the US to decrease production. Rig counts, gasoline inventories, and increased optimism show that the US may not be so aggressive in curbing output. With the peak driving season considered to be ending in September look for a glut either on the crude or refined sides leading to $40 prices.
http://www.platts.com/news-feature/2016/oil/african-energy-outlook/index
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