The strike at US refineries got a bit bigger over the weekend – all amid the most volatile, and now downward, price swings seen in the last six years. Investors have yet to lose hope in a sustainable rebound, but another prolonged fall may be looming ahead.
The United Steelworkers union (USW) and Royal Dutch Shell – big oil’s lead representative in the matter – failed to reach an agreement on wages, safety measures, and benefits last week. As a result, 1,400 workers at two BP-owned refineries joined the work stoppage on February 8. Since the beginning of the month, USW members have walked out of 11 refineries, leaving approximately 1.82 million barrels per day of refining capacity in the hands of retirees and last-minute, non-union replacement workers.
Still in its early stages, the strike has room to grow. The USW national contract – which expired February 1 – covers nearly 30,000 workers, 65 facilities, and around two-thirds of the nation’s refining capacity. The nature of the negotiations remains unclear, but the sides appear to be far apart. The union has already rejected five offers from Shell and threatened further walkouts if progress is not made.
To date, contingency plans and local bargaining have limited any drop in output – positive pressure on both crude and gasoline prices has been virtually non-existent. Instead, downward pressure caused by the work stoppage has only increased the recent volatility, muddying any understanding of the true bottom. The last strike, in 1980, lasted three months.
Refinery stoppages, or even threats, tend to reduce purchases of crude – an untimely effect as US crude oil inventories are at their highest level in more than 80 years. The Energy Information Administration reports that inventories are up 6.3 million barrels since the week ending January 23, and up 55 million barrels since this time last year. West Texas Intermediate (WTI) fell more than five percent on the news. Of course, a declining US rig count and OPEC’s forecast for increased demand in 2015 sent WTI March futures climbing seven percent over a three-session period spanning the weekend. Now, weak Chinese demand and an uncertain European macroeconomic picture have prices marching downward again.
With little to draw on and increasingly superficial market changes, industry players are as confused as they’ve ever been. Citigroup’s global head of commodity research Ed Morse believes we’re headed down, and relatively soon. According to Citi, the oil market can expect to bottom out sometime between the end of Q1 and the beginning of Q2. Just where that bottom lies is left for the imagination, but Morse expects prices somewhere between $20 and $40 per barrel – this echoes the sentiment out of Morgan Stanley, which foresees oil hitting $43 in Q2. The multinational banking corporation predicts Brent crude will average $54 per barrel in 2015.
For the time being, crude supply will continue to grow: production is increasing in the US; Brazil and Russia are maintaining order; and the Saudis continue to undercut prices in the valuable Asian market. Capex and maintenance cuts around the globe should bring about a slowdown in Q3, but a ‘V’ shaped price rebound is not in the cards.
Most Western producers are still very much price takers, but the “call on OPEC” is increasingly outdated as an indicator of the cartel’s pricing power. In its place, the “call on shale” will define price movements in the coming years. As WTI and Brent rebound in the second half of 2015, so will production growth in the US. Of course, then it’s down again, like a ‘W’, as shale settles into its role as moderator.
First published at www.oilprice.com