"Fast forward to today, where the crude curve is rather flat. Translation: We figured out the technology to get our costs down and we can get more oil out of the ground at today's price level."

The result, crude oil stocks in the U.S. hit an all-time record high last week. (For the purist, if one adds back in the 32 million barrels of lease crude oil stocks, one can see that today's inventory levels are higher than those reported in October 1929).

Higher prices also helped reduce the incentive to store oil on tankers. While floating storage in the North Sea has all but disappeared, the December production rush pushed oil sales into Asia where tankers are currently backed up awaiting discharge orders in places like Singapore.

OPEC and non OPEC producers probably did not count on the resiliency of shale oil producers and other around the world to cut costs and improve efficiency. In its March 7, 2017 Short Term Energy Outlook, the EIA is now forecasting all time record crude oil production in the U.S. of 9.7 million barrels per day in 2018, up 800,000 barrels per day from 2016 levels.

While most of the talk has been about the Permian Basin, other producers have also cut costs. Last August, Statoil announced that its Johan Sverdrup North Sea oil discovery is profitable at $25 per barrel. Late last year, Canadian oil producers announced expansion projects: Cenovus at Christina Lake and CNRL at Kirby North.

Add to the mix the return of Libyan oil supplies and the oil market is simply not drawing inventories as fast as OPEC and non OPEC producers would like.

Twelve years ago, when crude oil first hit $60 per barrel, the market saw its deepest contango ever. Translation: If crude oil supplies are tight now, imagine what it will be in the future and we need much higher prices to get it out of the ground.

Fast forward to today, where the crude curve is rather flat. Translation: We figured out the technology to get our costs down and we can get more oil out of the ground at today's price level.

As oil remains under pressure in the near term awaiting signs of declining inventories, the long liquidation is likely to drag prices down to $45 per barrel. In response OPEC and no-OPEC producers will be forced to issue a series of pronouncements indicating their seriousness at reducing the oversupply, most likely culminating in an agreement in May to extend production cuts until the end of 2017.

They can only sit by and hope that the International Energy Agency is correct in forecasting a 1.4 million barrel per day demand increase in 2017 to soak up the surplus.

In the meantime, could oil prices rise to $60 on the back of some geopolitical event? It is not hard to imagine. But looking ahead, I expect WTI prices to be at $55 come January 2018.

Commentary by Andy Lipow, president of Lipow Oil Associates.



Disclosure: Andy Lipow and Lipow Oil Associates do not own or trade any of the stocks mentioned above.

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