Introduction Oil's rally in March back from its 12-year lows on January 20 this year appears to be stalling. Although many investors continue to hold out hope for oil prices to stabilize in the $40 bbl-range, this relief rally may be short-lived. Oil is likely headed back below $30 because of problems with oil storage capacity, consistent oversupply issues, and major producers inability to cut production. As oil prices continue to fall, this will negatively impact energy sector companies. This will hurt all five supermajor integrated oil & gas companies, none of whom have made significant production cuts in recent months. Oil Below $30 With Brent Crude trading today at around $39 bbl and WTI Crude trading at around $37 bbl, investors are operating under the assumption that oil prices will not dip back below $30 like in January. After all, investors are optimistic that OPEC will follow through on an oil output freeze set to be finalized at its next meeting in mid-April. But regardless of whether or not there is an OPEC oil output freeze, other issues remain unresolved such as problems with oil storage capacity, consistent oversupply, and major producers inability to cut production. Oil storage capacity is becoming an increasingly problematic issue. In the United States, a record-high 523 million barrels of crude oil are being held in various storage facilities across the country. On a global level, 3 billions barrels of crude oil and products were being held in commercial storage across the 34 most developed countries as of last December. Excess capacity is so high that millions of barrels are being held in offshore tankers as global storage space continues to dwindle. Source: theglobeandmail.com Even if OPEC decides on an oil output freeze, significantly more oil is being produced than is being consumed. Since late 2014, oil production has outstripped demand by an average of 1.5 million barrels per day. This supply glut is why oil prices have continuously declined since 2014 and all of this is exacerbated by storage capacity issues. The excess production problem will likely continue since both Saudi Arabia and Russia have no plans to cut their production of over 10 million barrels per day. Source: Bloomberg.com The other problem is that major producers are unwilling to significantly cut production. Exxon Mobil (NYSE:XOM), Shell (NYSE:RDS.A), Chevron (NYSE:CVX), BP (NYSE:BP), and Total (NYSE:TOT) have not made any significant cuts in production, but this is understandable given their responsibility to maximizing profits for their shareholders. But since neither oil producing states nor oil supermajors are willing to cut production, this will continue to exacerbate oversupply issues. On top of this, several bankrupt oil shale companies continue to operate and pump excess oil into the market. Low oil prices in January had a significant impact on the share price of all five supermajor integrated oil & gas companies as can be seen in the chart below. Company 1/20/16 4/5/16 Change CVX $78.98 $92.67 17.3% XOM $73.18 $82.21 12.3% TOT $40.21 $43.84 9.0% RDS.A $36.87 $46.72 26.7% BP $28.46 $28.93 1.65% There are a few interesting trends to note. Shell's share price has seen the most rapid rebound and this can be chalked up to significant capex cuts and adjustments by its senior management team to dealing with lower oil prices. But BP presents an interesting case where the oil price rebound has not translated into significant share price appreciation. As I have argued previously, BP is in a significantly more precarious situation compared to the other oil majors because of its refusal to cut its dividend and its false operating assumption that oil will trade at $60 bbl this year. Conclusion Although commodity investors continue to hold out hope for a stronger oil price recovery, there is a low likelihood of this actually occurring. What is more likely is that oil will head back below $30 because of problems with oil storage capacity, consistent oversupply issues, and major producers inability to cut production. As these problems become more apparent, this will put additional downward pressure on already depressed oil prices. Disclosure: I am/we are long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Numerous indicators, such as issues in oil storage capacity, consistent oversupply problems and major producers inability to cut production, reveal that oil will fall back to below $30, regardless of whether or not there is an OPEC oil output freeze. The IEA report also shows the impact on global crude prices from a possible production freeze by OPEC, which would be implemented if non-members agreed to it.