Do Oil Prices Have Room To Fall Further?

Nigeria, Libya Oil Output Threaten Global Market

"Some market participants recognized that prices went up too strongly last week", said Carsten Fritsch, an analyst with Commerzbank.

Strategist Michael McCarthy said that "Oil prices received momentum from Wednesday's USA data and the market rejected the lows that we saw".

Taking Dubai oil as a benchmark, prices so far in 2017 are 25 percent above last year's $41 average, while OPEC production in the same time is 2 percent, or 700,000 bpd, below 2016's average, he said. The ding-donging over market share and price control continually witnessed advantage shifting from the United States to OPEC members and vice versa. Seven percent see geopolitical threats as a bigger factor affecting prices, and six percent expect OPEC will be the greatest influence in the second half of the year.

Bank of America Merrill Lynch analysts cut their forecasts on Friday, saying the rise in output from Libya, Nigeria and US shale fields coupled with weaker demand growth, meant the market would be more oversupplied than previously expected.

OPEC and Russia's supply quotas were offset by robust production from the U.S. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ending Aug 29 and Sep 12. Shale oil producers have intensified technological research and with generous incentives including hedges continued to give signals and threats that their production cost would soon have a breakeven to cripple conventional oil produced by OPEC.

In a separate note on Wednesday, Goldman cut its WTI forecast for the next three months by $7.50 a barrel to $47.50. However, if there is a big change in the horizontal rig count in the USA, bringing the number down or stock draws are continued or the OPEC production limits are increased, then the situation and pricing could be substantially impacted. In the last week, there was a decrease of 2 operating rigs in the USA, pushing the total number to 756, the highest since April 2015.

Libya'a oil output has rebounded from only 690,000 barrels a day at the start of the year, with Sharara, the country's largest oil field, resuming production last month. Iranian Oil Minister, Bijan Namdar Zanganeh expressed fears of a consensus at the expiration the present cut in 2018. "We could see more gains if there is a further drop in oil output, and the other factor is a weaker USA dollar".

In 2010, the USA imported 983 million barrels of oil from Nigeria. Since January 2017, shale production has started to edge up and is now nearly back near its peak. The ouster and killing that year of former leader Moammar Al Qaddafi led to a collapse in central authority, and many foreign investors withdrew as armed groups fought for control of oil facilities.

On the inventory side, USA oil inventories fell by 0.8 per cent MoM in June to 509.2 million but were 3.1 per cent higher YoY.

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