XOM Exxon Mobil Corp

By Amrith Ramkumar 

Growth in oil supply is expected to accelerate next year as global production increases, keeping crude mired in a bear market and possibly lowering fuel prices for consumers.

At the same time, anxiety about trade tensions crimping global growth and weakening demand has bolstered concern about a supply glut in recent months, investors say.

The U.S. benchmark for crude fell 7.9% to $53.95 a barrel Thursday, logging its largest one-day percentage drop since February 2015, after President Trump said on Twitter that tariffs of 10% would be applied to an additional $300 billion of Chinese goods and products starting Sept. 1.

Before Mr. Trump's tweet, oil prices were down as the dollar strengthened after the Federal Reserve refrained Wednesday from explicitly confirming more stimulus.

The U.S. is forecast to continue driving much of the surge in output, and increases by smaller producers such as Brazil and Norway are expected to contribute to excess supply, according to investors. 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.

The expected oversupply is 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 Thursday the latest major energy company to report a drop in second-quarter profit from a year earlier.

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. Transportation companies including Union Pacific Corp. have cited lower fuel costs as a positive for second-quarter profits, though there is still concern about economic uncertainty and demand.

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. Yet 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.

Before Thursday's slide, U.S. crude prices had 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 from its current bear market, which began in early June when crude closed 20% below its April high.

Prices are up in 2019, though they are still down about 20% 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 expects 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.

Prices haven't seen a boost even with supply disruptions at their highest 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 hope 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.

With the S&P 500 energy sector down about 20% 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.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

(END) Dow Jones Newswires

August 01, 2019 21:47 ET (01:47 GMT)

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