Oil At $60: How Marginal Producers Cope Will Shape Market Direction

As we approach the midway point of the current trading year, it has become apparent that oil benchmarks would find it hard to escape the $50-$75 per barrel range for the rest of the year, and much of 2016. Macroeconomics of the day also does not point to a dip below $50 barring the occurrence of an unforeseen financial tsunami.

As most producers are looking at non-OECD markets to export to, and demand there is holding up, if not firing on all cylinders, a steep price drop is highly unlikely. Atop the much asserted claim of too much oil coming on the market – in the region of 1.1 to 1.3 million barrels per day (bpd) by some accounts – each time there is minor uptick in price, a swift downward correction follows suit. Trading in recent weeks offers ample proof of this.

Furthermore, many producers large or small have kept their powder dry. The moment there is any sign of a mini price rally, more oil will come to the market acting as a corrective mechanism. Geopolitical risk, barring a flare-up of epic proportions, is being neutralized by the oversupply situation which has not eased as quickly as some had imagined.

Keisuke Sadamori, International Energy Agency’s Director of Energy Markets and Security, speaking at the World National Oil Companies Congress in London, UK on 16 June, 2015 © Gaurav Sharma

Keisuke Sadamori, Director of Energy Markets and Security at the International Energy Agency, reckons the oil markets may as well get used to the current lull. “We see plentiful supplies and a firmer dollar limiting an oil price spike. Despite easing from March and April’s highs, oil production growth [on an annualized basis] stood at a robust 3 million bpd that’s split between OPEC and non-OPEC producers,” the Japanese official and IEA expert said earlier this month at the recent World National Oil Companies Congress in London.

Sadamori added: “Non-OPEC producers like Russia are showing much more resilience than most in the market had anticipated. All the while Saudi Arabia, Iraq and United Arab Emirates continue to pump oil at record monthly rates.”

So, over the short-term we may as well get used to the ingenuity of US shale players in keeping things going when OPEC expects them to trip, Saudis filing record production data each month, T. Boone Pickens claiming they are bluffing, and OPEC doing nothing!

Also, don’t forget the Iranians could add at least a minimum of 200,000 bpd at some point this year. All the while, every producing nation from Canada to Mexico should be expected to make the best of a troubling situation