×

Speculators got crushed while oil industry may have learned lesson and is more cautious on prices

The sharp drop in oil prices Wednesday may have crushed some speculative traders but did not come as a big surprise to some oil industry executives who have been planning for price volatility.

The crushing 5 percent decline came a day after OPEC and non-OPEC members reaffirmed their commitment to cut production but stopped short of saying they would extend the six-month agreement when OPEC meets in May. Instead they said they would review the situation and weigh the supply situation when they meet.

Oil fell Wednesday after U.S. government data showed another build of 8.2 million barrels, and U.S. production continued to creep higher to 9.1 million barrels a day.

"We aren't really planning for an oil price much different than this," said Al Walker, CEO of Anadarko Petroleum, attending the annual CERAWeek by IHS Markit conference in Houston. He said he has been expecting volatility and has not been planning for a much higher price. West Texas fell to just above $50 per barrel and Brent was about $53 per barrel Wednesday.

Walker's comments echoed those of other chief executives at the conference, including ConocoPhillips CEO Ryan Lance who discussed keeping costs down amid expectations for a low price environment. BP Group Chief Executive Robert Dudley said he's planning for "lower for longer prices" in the $55 to $60 per barrel range for the next five years. Dudley said he does not see the price dropping much lower than current levels, and he said Tuesday that he expects the agreement between OPEC and non OPEC producers to help support prices.

Continental Resources CEO Harold Hamm said Wednesday afternoon he doesn't see prices getting "much weaker" than they are now.

"We're kind of tethered to the agreement between OPEC and non OPEC" producers, said Walker.

Saudi Arabia energy minister Khalid Al-Falih on Tuesday told reporters, in an impromptu press briefing Tuesday, that the producers welcomed the return of shale and said it would help fill some demand and make up for declines elsewhere.

But some of the talk ahead of and during the conference was whether the resurgence of shale production would impact the agreement between Saudi Arabia and other OPEC nations with Russia and other non-OPEC producers.

Al-Falih on Tuesday also said Saudi Arabia would not tolerate "free riders" and expected all 24 countries in the agreement to pull their weight and keep to commitments to cut back.

But some analysts say the market is getting concerned that inventories are not dropping though OPEC Secretary General numerous times this week explained that OPEC is watching offshore inventories and it sees some success, while the U.S. is studying government data on U.S. storage.

But analysts say the market was also considering the fact that OPEC officials attending the CERAWeek conference did not commit to an extension of their deal and continued to point to a decision coming when OPEC next meets in May. There has also been some skepticism about the compliance with the agreement thought OPEC official said February numbers would show improvement.

"Despite continued strong OPEC cuts and compliance in February, the markets are simply getting impatient waiting to see any impact on US crude inventories, which have now built every week this year, by 784 kb/d since December 30," wrote Michael Wittner, global head of oil research at Societe Generale. Wittner, in an email, also told CNBC as oil broke down Wednesday, WTI fell through its 100-day moving average and is now teetering on an important level.

"$50 is a technical support level for WTI, but more importantly, it is a key psychological level both for the oil markets as a whole, as well as for US shale producers," said Wittner. Analysts say the decline in oil was also accelerated by the rush of speculators out of long positions.

"It was the same set up as 2014, speculators were long, and commercial interests were short," said John Kilduff of Again Capital. Commercial interests represent the hedging by oil companies and others in the industry.

The build in supply comes in the turnaround season for refiners, when they normally use less crude and some analysts had been expecting a dip in prices, especially with large U.S. gasoline supplies. West Texas Intermediate futures plunged more than 5 percent to a three month low of $50.28 per barrel.

"Sentiment is not going to be conducive to support prices as we enter into the turnaround season. Second, Nigerian output has made some recovery thus negating the impact of more severe OPEC cuts and a relapse in Libyan output," noted Michael Cohen, head of energy commodities research at Barclays.

"We maintain our bullish view on Q2 and see this as just setting the stage for breaking the upper bound of the recent mid 50s trend as soon as we get closer to summer," wrote Cohen in a note.

Energy

Latest Special Reports

  • Tightrope walker

    This special report focuses on how individual investors strategically juggle their many savings goals and objectives.

  • A look at 50 private companies set to reshape the business landscape.

  • Business icons and provocateurs share their innovative models. Learn how to upend old industries and start new ones that move markets.