Surging Saudi oil production is driving oil prices lower

Since June 23, when West Texas Intermediate (WTI) crude closed at $61/bbl, oil prices have been in meltdown mode, say Raymond James analysts, who, in a recent report, have commented on effects of the current surging supply of oil from Saudi Arabia, Iran, and Iraq.

The analysts regard current oil market sentiment to be “as ugly as it's been since January.” While there is no single culprit for this latest selloff, they believe there are four fundamental oil model concerns that have contributed to lower oil prices over the past six weeks:

  • Saudi oil production is at record-high levels as it continues its (increasingly irrational) price war with non-OPEC producers.
  • With the Iranian nuclear agreement having been finalized, there is greater visibility on recovery in Iranian oil exports.
  • Iraqi production has seen substantial and inexplicable surge over the past two months. 
  • Collapsing Chinese stock market headlines (and to a lesser degree the Greece/Eurozone issues) have intensified concerns about global oil demand, even though Raymond James believes these concerns are more sentiment than substance.

The report concludes, “Bottom line: Even if we exclude the potential (and premature) negative impact of rising Iraqi supply and uncertain Chinese demand, our 2016 oil model is substantially more bearish today than a few months ago. That means we no longer believe that oil prices should rebound to $65/bbl in 2016.

“Our new WTI forecast is $50 for 2015, rising slightly to $55 in 2016. For Brent, we are at $56 for 2015 and $62 for 2016. Our new 2016 forecast is $10 lower than our previous $65 estimate. This means the industry is set for a second straight year of painful austerity, with 2016 capital spending likely to average flat to down vs. 2015.”

The report adds that the “silver lining” of these reduced estimates is that low oil prices cure low oil prices. Specifically, the flood of large oil project cancellations and delays has set the stage for a potentially undersupplied oil market in 2017/2018, “which leads us to maintain our long-term (2017+) price forecast ($70 WTI/$77 Brent). We should also note that these new oil price forecasts do not include any unforeseen Middle East outages. Oil prices at current levels are clearly pricing in minimal risk of future supply disruptions. That means energy stocks still hold substantial ‘Middle East unrest’ option value for investors.”

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