With the price of crude oil for March delivery falling below $60 a barrel last week on the New York Mercantile Exchange (NYMEX), half of OPEC’s worst nightmare is taking place: Higher oil prices sought by the cartel are bringing on American production at a faster rate than ever before. The other half of the nightmare would be a slowdown in global demand for the stuff.
A sell-off was triggered by an announcement last week from the Energy Information Agency (EIA) that U.S. crude oil production exceeded 10 million barrels per day (bpd) last month — the first time since 1970 — and would continue to set records into 2018. In addition, U.S. oil rig count jumped by 26, the largest jump in a year.
Helping along was the overbought position by traders expecting crude oil prices to move even higher. It’s estimated that those traders owned a billion barrels of oil through futures and options contracts, and when oil began to tip over, many rushed to unload them, accelerating the decline.
Also adding to the downward pressure was the little-noticed part of the budget bill passed late last week that mandated cutting the United States’ Strategic Petroleum Reserve (SPR) by 100 million barrels. That would raise about $6 billion for the U.S. Treasury at today’s prices, and although not scheduled for immediate sale, it’s more pressure to the downside.
Along with that is the restarting of the North Sea crude oil pipeline that was taken offline unexpectedly, affecting more than a third of its crude oil production.
Analysts at Commerzbank put two and two together and cogently concluded that crude oil prices had nowhere to go but down:
It is now clear that oil prices in late January [Brent briefly traded above $70 a barrel] were too high to keep the oil market balanced in the long term. This is because U.S. production is now rising so sharply that there is a risk of renewed oversupply if OPEC does not voluntarily renounce [give back] market share.