Why Did Natural Gas and Crude Oil Prices Diverge?
Russia and Saudi Arabia’s production
Russia produced 10.7 MMbpd (million barrels per day) of crude oil in May 2015—the same as April 2015. It produced 10.08 MMbpd in May 2014. Russia is producing more in order to offset lower crude oil prices. The record crude oil output from Russia will continue to put pressure on the crude oil market. Russia isn’t in a mood for an oil production cut in the near term.
Like Russia, it’s estimated that Saudi Arabia will produce more crude oil in order to defend its market share. As the world’s largest crude oil exporter, Saudi Arabia produced 10.3 MMbpd in May 2015. This was in line with the levels in April 2015. Saudi Arabia produced 9.7 MMbpd in 2014. Citigroup forecasts that the oil output could rise to 11 MMbpd in 2H15.
EIA (U.S. Energy Information Administration) data showed that the crude oil output fell by 21,000 bpd (barrels per day) to 9.589 MMbpd for the week ending June 12, 2015—compared to 9.610 MMbpd for the week ending June 5, 2015. Last time that the US output was at this level was in the 1970s. Goldman Sachs estimates that the US crude oil output might slow down in the later half of 2015. It could pick up in early 2016. The consensus of massive production from the US, Russia, and Saudi Arabia will negatively impact crude oil prices.
Upstream companies like Noble Energy (NBL), Occidental Petroleum (OXY), and Carrizo Oil & Gas (CRZO) have increased their 2015 oil production outlook despite volatility in the crude oil market. Volatility adds pressure to ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Select Sector SPDR Fund ETF (XLE).
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