The oil markets have been searching for a bottom since OPEC’s meeting last month in which they decided to maintain production cuts. I shudder to think of where oil prices might have ended up had they abandoned the cuts, as crude prices have dropped about 10% with the cartel keeping the cuts in place.

In the past two weeks, President Trump’s decision to leave the Paris Accord, OPEC’s decision to maintain production cuts, and the decision by five Arab states to sever ties with Qatar have all contributed to declines in the price of oil. This is only possible in a bear market, as most of these items should be at best neutral and in some cases positive for oil prices. I still think the bottom is in the mid-$40s, but we are there now, so we shall soon find out.

With that preface, here are some of the top stories in the oil markets this week.

Dakota Access Pipeline In Service

In January, I made five predictions for the energy sector in 2017. My #1 prediction was “Crude oil will flow through the Dakota Access Pipeline (DAPL) in 2017.” I made this prediction precisely because Donald Trump won the presidency, as I was pretty sure Hillary Clinton would have let this issue drag out in the courts throughout the year. On the other hand, I thought Donald Trump would resolve the issue quickly, that the pipeline would be completed, and the oil would flow.

He did, and it has. Vicki Granado, a spokeswoman for the pipeline’s developer Energy Transfer Partners (NYSE: ETP), announced that full operations had begun on June 1. The controversial pipeline transports crude oil from the Bakken/Three Forks production areas in North Dakota to a storage and terminalling hub outside Pakota, Illinois. The pipeline had been the subject of a wave of protests last year, which drew support from environmentalists around the world.

Dave Archambault II, chairman of the Standing Rock Sioux, vowed to continue fighting: “We will continue to battle the operation of this pipeline in court and remind everyone that just because the oil is flowing now doesn’t mean that it can’t be stopped.” 

A New U.S. Oil Production Record In Sight?

Last week energy data firm Rystad Energy suggested that U.S. oil production could reach a new record high by the end of 2017, “as growth from shale drilling and Gulf of Mexico deep-water fields offset declines from other U.S. conventional oil fields.” The firm noted that U.S. oil production is growing at about twice the rate analysts had expected with oil prices at $50/bbl (myself included) and that this was fueling skepticism about whether OPEC’s production cuts would ultimately succeed.

Meanwhile, the Energy Information Administration’s (EIA) newly-released Short-Term Energy Outlook (STEO) is now projecting that U.S. oil production will reach a new record high next year:

“U.S. crude oil production averaged an estimated 8.9 million b/d in 2016. U.S. crude oil production is forecast to average 9.3 million b/d in 2017 and 10.0 million b/d in 2018. The 2018 forecast exceeds the previous record level of 9.6 million b/d set in 1970.”

The STEO also projected that global crude oil inventories would decline by about 0.2 million barrels per day (BPD) in 2017 and then increase by an average of 0.1 million BPD in 2018.

These fears of an inventory overhang that won’t go away are the primary driver of the oil markets right now. 

Crude Inventories Climb

When it rains, it pours. U.S. crude oil inventories have been steadily dropping for two months and were forecast to fall again this week. The American Petroleum Institute (API) reports crude stocks each week before the Wednesday release of the EIA’s Petroleum Status Report, and API reported an inventory drop of 4.6 million barrels. Analysts polled by S&P Global Platts forecast a fall of 3.5 million barrels.

Instead, the EIA reported a surprise build of 3.3 million barrels, which drove crude prices down by 5%. The sell-off in the energy sector was broad and swift, but hardest hit were independent oil and gas producers.   

U.S. crude oil inventories now stand at 513 million barrels, down from the record 535 million barrels at the end of March, but 11 million barrels higher than the level of a year ago. Investors are so skittish in the current market, that a surprise increase trumps the sustained draw on inventories we have seen over the past two months.    

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