Syed Rashid Husain An extraordinary week has just passed by. Oil markets have been on a rollercoaster, not seen in almost a quarter of a century, for almost the entire week. After enjoying its strongest rally for 25 years over the three sessions last Monday and surging 25 percent, Brent endured its worst fall for four years on Tuesday, closing nine per lower. The US benchmark WTI too experienced its most volatile run since the Iraq war days of 1991, swinging by more than six per cent for four straight trading days. A number of factors seem to have impacted this wild crude run. The August OPEC Bulletin, released last Monday, was seen with much interest - perhaps too much - all around. Markets read the commentary, “Cooperation holds the key to oil's future,” in the bulletin as an indication that OPEC was finally considering to change its course. The article concluded by underlining the need of cooperation among major players. Indeed the "continuing pressure on prices… remains a cause for concern for OPEC and its members" and that it "stands ready to talk to all other producers." “Cooperation is and will always remain the key to oil's future and that is why dialogue among the main stakeholders is so important going forward. There is no quick fix, but if there is a willingness to face the oil industry's challenges together, then the prospects for the future have to be a lot better than what everyone involved in the industry has been experiencing over the past nine months or so,” the report highlighted. Major oil market players were finally getting ready to work together on a coordinated output cut, many in the markets thus felt. To some this commentary offered a glimmer of hope, of some sort of cooperation, between OPEC and non-OPEC players, so as to balance the markets. No doubt the Venezuela-Russia meeting also added fuel to the speculation. Consequently oil prices went up by more than 8 percent on the last day of August. The bulletin also highlighted that apart from the obvious loss of much-needed revenue required for the socio-economic development of member countries', there were also growing fears, that under the current low-price scenario, investment in future capacity additions will continue to be shelved or cancelled altogether. And failure to invest now could mean prices in the coming years spiking to levels inconsistent with what is considered ‘reasonable' for both producers and consumers. Another major reason for the spike was the very significant downward revision by the EIA of US oil production data, pointing to sharper contraction than was previously assumed. The new data showed that between January and May, the US actually produced 40,000 to 130,000 fewer barrels per day than the agency had previously reported. And then, in June too, oil production dropped by another 100,000 bpd from the month before, hitting just 9.3 million bpd. The largest downward revision came from Texas, which has been producing 100,000 to 150,000 fewer barrels than previously reported for the first half of this year. Thus for several months, the oil markets were wrongly accounting for higher US output than was actually produced. Instead of continuing to climb through much of the spring and leveling off into the summer, as was estimated earlier, oil production in the US actually peaked in April and has declined consistently since then. And when the EIA released this latest revision on Aug. 31, oil prices simply went up. In the meantime, Canada too suffered output outages. Canadian Oil Sands had to shut down production of its synthetic crude oil facility after a fire damaged equipment. And Nexen Energy, an oil producer in Canada and subsidiary of China's CNOOC, had to close 95 pipelines after inspectors found problems with them. A firmer US dollar also hurt oil prices by making the commodity expensive for holders of other currencies. And none can deny that, speculation too helped the crude spike. Yet, when US crude stocks saw an unexpected gain of 4.7 million barrels to 455.4 million in the week to Aug. 28, the biggest one-week rise since April, markets began caving in. The downward cycle had begun. But as oversupply continue heading into the autumn period, during which refinery demand typically falls, markets appear registering the fact the price spike is not supported by fundamentals. Worries about Chinese economic downturn also continue to haunt the markets, forcing the markets take a slippery route. In the meantime, technology too is taking lead in ensuring the shale momentum. US drillers like Liberty are helping the shale revolution continue, despite lowering markets, by driving down the break-even cost of producing a barrel of shale oil through innovation and cost-cutting. One of the tools, producers are increasingly turning to is a type of high-intensity hydraulic fracturing that helps them produce oil and gas more economically. Companies like Liberty and EOG Resources have recently been advocating a fracking method that uses more water and minerals to break up shale at high pressure in multiple stages. Both companies utilize a method of fracking called plug-and-perf and a mix of water, minerals and chemicals called slickwater to create massive networks of fractures. These fracks contain a large amounts of ceramic, which keep the fissures in the shale rock open, promoting conductivity. Due to this development, despite a reduction in well completions this year, Liberty Oilfield Services has reportedly pumped 75 percent more fracks in the first seven months of 2015 compared to the same period last year. And this explains the consistent US output despite, the lowering prices. Venezuela is also endeavoring to up its output further. Venezuela and China have just signed a deal for a $5 billion loan designed to increase the country's oil production, Venezuelan President Nicolas Maduro was reported as saying. And with Iran very likely to ramp up its output (assuming its nuclear deal holds in the US senate), a price recovery could hit more stumbling blocks further down the road. Citigroup analysts too think the rebound was overdone, calling it a “false start,” and the 27 percent gain in just three days was “driven by a misread of market data and financial headlines.” Thus despite the extraordinary spike of last week, crude markets don't seem to be out of woods - yet. Glut remains the star and the prospect of any real output coordination among producers' too seems still distant - to say the least.
