Expected Oil Supply Surge Sustains Bear Market -- 2nd Update
August 01 2019 - 2:17PM
Dow Jones News
By Amrith Ramkumar
Growth in oil supply is forecast to accelerate next year in a
global wave of production, keeping crude prices mired in a bear
market and possibly lowering fuel prices for consumers.
The U.S. is expected to continue driving much of the surge in
output, and increases by smaller producers such as Brazil and
Norway will contribute to excess supply, investors say. Citigroup
and JPMorgan Chase analysts currently project supply will grow
roughly one million barrels a day more than demand in 2020,
resulting in a surplus each quarter of next year.
Oil fell about 6.5% to $54.80 a barrel Thursday, heading for its
largest one-day drop of the year and extending losses after
President Trump announced 10% tariffs on some Chinese imports
starting Sept. 1. Anxiety about trade tensions weakening demand has
bolstered worries about a supply glut in recent months, investors
say.
Plentiful supply has been a boon for U.S. consumers, who are on
average paying less for gasoline at the pump this summer than they
were a year ago and continue to drive economic growth even as
business investment slows. Companies including railroad operator
Union Pacific Corp. have also cited lower fuel costs as a positive
for second-quarter profits, though worries about economic
uncertainty and demand continue to hurt transportation firms.
The expected oversupply is also the latest threat to the
Organization of the Petroleum Exporting Countries and other
producers, many of which are curbing output to try to balance the
market.
Investors will be monitoring quarterly results from Exxon Mobil
Corp. and Chevron Corp. on Friday after most of the large energy
companies reported underwhelming figures for the first three months
of the year. Royal Dutch Shell PLC became the latest energy giant
to report a drop in second-quarter profits from a year earlier
Thursday.
Many investors have long expected a surge in U.S. shale
production to continue as new pipelines from the prolific Permian
Basin of Texas and New Mexico ease bottlenecks in the region. But
analysts said the addition of barrels from ancillary producers
threatens to make the expected surpluses bigger, particularly as
concern about a slowing world economy triggers fears about
crumbling demand.
Analysts estimate output from offshore projects in Brazil, a
Norwegian oil field in the North Sea and easing production
curtailments in Canada could produce several hundred thousand
barrels a day of crude next year. That figure is still relatively
small, but growth from those projects is bolstering bets output
will exceed consumption.
"Those are very relevant in tipping the scales," said Rebecca
Babin, a senior energy trader at CIBC Private Wealth Management.
"It's very hard for people to look at the 2020 supply-demand
imbalances and want to get long," referring to bullish
positions.
The projections for oversupply explain in part why oil prices
have barely moved in response to recent attacks in and near the
Strait of Hormuz, a critical shipping area near the Persian
Gulf.
U.S. crude prices have generally stayed in a range of $55 to $60
a barrel during the past six weeks, remaining well below their 2019
peak above $66. Oil would need to close at or above $61.37 to exit
its current bear market, which began in early June when crude
closed 20% below its April high.
Prices are up sharply in 2019, though they are still down about
15% in the past year. The moves have encouraged hedge funds and
other speculative investors to boost bets prices will fall. The
ratio of bullish bets to bearish wagers by the group on U.S. crude
has fallen to just over 3, down from last year's peak of 26 in July
2018. The most recent figures showed speculators increased bearish
bets by nearly 50% from a week earlier.
"There's a greater appreciation now that we're not in a
supply-constrained world," said Noah Barrett, an energy research
analyst at Janus Henderson Investors.
Inventories have already been rising. Oil stockpiles in
Organization for Economic Cooperation and Development countries
rose in each of the first five months of the year, the
International Energy Agency estimates. The group projects that the
world's requirement for OPEC crude is set to fall next year to its
lowest level in 16 1/2 years as supply outside the cartel
rises.
Oil has barely budged, with global supply disruptions at their
highest level in three decades. That means any shifts in sanctions
policies affecting Iran and Venezuela or other political
developments could add to bearish momentum.
"Some of the constraints on capacity could come off if
geopolitical events change, on top of the potential growth," said
Darwei Kung, a portfolio manager of the $2.8 billion DWS Enhanced
Commodity Strategy Fund. "That's one of the reasons we're a little
bit concerned about what the increase might mean to the global
balance."
Still, some analysts are hopeful that OPEC will continue curbing
output and that demand will exceed low expectations, supporting
crude and beaten-down shares of producers. Investors are also
demanding discipline from U.S. oil companies, many of which are
limiting production activity.
And with the S&P 500 energy sector down 19% in the past
year, some say companies with lower costs and higher shareholder
returns look attractive, even if oil stays in its current
range.
"The way to play it is to be cautious and select the quality
names," said David Yepez, a portfolio manager at Exencial Wealth
Advisors, which has been increasing positions in Exxon and Pioneer
Natural Resources Co. recently.
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Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
(END) Dow Jones Newswires
August 01, 2019 14:02 ET (18:02 GMT)
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