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In the ongoing journey back to market normalization, the oil industry and its major players wrapped up June with fewer long-term assurances than they would've hoped.
For the entirety of 2017 (and much of late 2016) oil majors have had their eyes on rising oil prices to make up for historical profit losses. But with inventory levels still significantly high on average and the re-emergence of North American shale output into the global market, oil prices haven't climbed much at all year over year.
In June specifically, analysts are now predicting the per-barrel price point of oil to fall below $40, CNBC reported. As of June 28, U.S. crude oil was trading at $44 a barrel, which most economists consider to be unsustainable.
When factoring in the U.S. Federal Reserve's recent interest rate hikes – which has affected future growth projections for oil – it's unclear how the remainder of 2017 will shape up.
Here are the key oil trends that rounded out June:
Prices unable to regain momentum
As Reuters noted, oil prices have fallen by one-fifth of their May value. And though prices are still higher than they were at this point last year – roughly $27 per barrel – the upward swing of prices hasn't materialized as many expected. And in the past few months, prices have endured a backslide, forcing many oil companies back to the drawing board to reassess their future business strategies and where their potential competitive advantages lie.
Consumers have enjoyed low prices at the pump so far this summer, but on the other side of the supply chain, producers are feeling every bit of the pinch for profits.
OPEC in particular, which is notoriously aggressive with its pricing strategies, has had to continually slash output without losing market share. But OPEC is conveniently positioned to still turn a minimal profit at current prices since much of its industry is subsidized or government-operated.
OPEC competitors such as Russia, Canada, the U.S. and many Western nations haven't fared as well in the recent oil landscape, however, as these countries have a looser grip on the total share of oil on the market and aren't able to reap financial rewards at such low prices.
This dynamic prompted CNBC to note that U.S. drillers – typically more expensive operations – will soon be priced out of the marketplace and refrain from drilling for more oil if prices dip just $4 lower per barrel.
Fed increases rates 0.25 percent
Compounding efforts to influence oil prices, the Federal Reserve has hiked its federal funds target range twice this year with the most recent increase occurring in early June. Economists with knowledge of conversations within the Federal Open Market Committee believe a third rate hike is still in the cards before the year is out.
Further, Fed Chair Janet Yellen has also stated her committee's intention is to move forward with future rate increases well into 2018. Dr. Kent Moors wrote on OilPrice.com that these movements were pre-planned and already priced into bond markets.
The oil market, on the other hand, is more skittish to hourly news updates and any perceived changes to its future projections, making Fed announcements a peculiarly sensitive subject to producers.
That's because the U.S. dollar – the primary currency used in oil trading – has now become more valuable (aka expensive). This effect results in equipment becoming more expensive and foreign nations having to shell out more cash to conduct normal business with U.S. operators.
Pertinent commodities associated with drilling, like processed materials and metals, are likewise becoming more expensive, potentially placing a dampening on producer incentives to ramp up activity.
At a higher level, rising interest rates may impact global business lending as well as government-sponsored activity in the energy market. Without ample financial incentives to support additional oil investments or credits, oil companies may receive fewer confidence-inspiring overtures from their respective governments.
OPEC and other oil majors still uncertain on future market trajectory
The total effect of these June events has created a hazy road forward for many in the oil industry. On the whole, the market is obviously not where it needs to be to prove profitable enough for all involved.
As Business Insider reported, oil prices are in the midst of their worst first half performance in 20 years, highlighting just how poor the market is and how far it still has to go to get back on track toward a sustained rebalancing effort.
Meanwhile, OPEC is still following through on its production cuts yet it's clear there's still a residual oil glut in the marketplace, so much so that OPEC will need to maintain its output slowdown for the foreseeable future.
But the latest news may not be entirely lukewarm, as weekly drips of information from foreign nations and U.S. government data have the habit of reversing the fortunes of producers, at least in a temporary manner. This is mostly true to the extent of inventory levels, which can be difficult to accurately record and report since there isn't a universal standard for doing so. If one week shows an unexpected drop in global inventory, prices are sure to rise.
To the contrary, if weekly figures represent a continued glut, or even rising inventory, prices may drop.
These intricacies tie back to the fickle nature of oil market movements and the investors who trade in real time based upon these many minute changes.
Heading into the third quarter of the calendar year, it's not implausible that prices could turn around, potentially climbing closer to $50 or $60 per barrel, which they were previously on track for.
Until that time, oil companies of all sizes will be keeping their cards close to their chests to ensure each dollar is appropriately spent on a revenue-generating venture rather than investments pinned to the future hopes of a market rebound.
Downstream Petroleum News provided by FireStream WorldWide, intuitively automated software solutions for the downstream petroleum industry. Go see a one-minute video to see how Ascend Wholesale can give a competitive edge to your fuel distribution company.