The long-battered price of oil has edged up lately, buoying the stock market. So, oil's long descent is over and things are returning to normal, right? Not quite.
Pell-mell production and record inventories are likely to keep oil prices low. They were just above $38 per barrel at Friday's close, down almost two-thirds from the recent peak in mid-2014.
Lately, though, optimism has filled the air amid talk that Russia, Saudi Arabia and three other big overseas producers will curtail their rampant output. In past months, U.S. shale production has fallen in response to the low prices. The International Energy Agency said last week that it sees "a light at the end of what has been a long, dark tunnel" for oil.
As a result, oil has climbed from its $28 low last month. And the Standard & Poor's Global Oil Index, which measures stock performance of 120 energy firms worldwide, is up some 20 percent since Jan. 20. Previously, oil's free fall had unnerved investors, who felt it signaled a broader weakness in the world economy.
Oil analysts surveyed by Bloomberg believe crude will hit $46 by the fourth quarter. If so, that's heartening for the oil industry: The rule of thumb is that it costs $36 to produce a barrel of oil in the U.S. While the analysts' consensus is nowhere near the June 2008 inflation-adjusted peak of $136, it's well on the way toward the $64 average price since 2000, using figures from inflationdata.com.
But there are considerable obstacles, and the current price rebound could be what Wall Street types call a "dead cat bounce." In other words, oil may well slump again. Here's why:
International production shows no sign of slowing. For the last two years, output has been on a tear, especially from the Saudis, who want to keep market share from parvenu U.S. shale outfits.
Spying relief at last, the stock market took wing in mid-February when Russia and Saudi Arabia, the world's biggest oil producers, and three other key OPEC members (Venezuela, Kuwait and Qatar) agreed to freeze output at January levels.
Trouble is, January's figure already was a high. And the Russia-Saudi agreement had a condition: Other producers had to agree to curtail their efforts.
Fat chance. OPEC member Iraq is pumping oil madly as it seeks to generate revenue to fight the Islamic State threat. Iran, freed from international sanctions, intends to double its oil sales. "The Kingdom knows that any cut in production would be filled by Iran ... or the U.S.," a report from France's Sucden Financial contended, referring to Saudi Arabia.
Certainly, the oil pact, such as it is, and the stock market jump it inspired served to fatten the oil powers' purses, at least for the short term. Petroleum consultant Art Berman wrote on his Forbes blog, "The OPEC-plus-Russia freeze is a cynical joke designed to increase their short-term revenues without doing anything about their production levels."
Meanwhile, the U.S. Energy Information Administration last week estimated that global oil production would stay at around 97 million barrels a day through 2016. Demand growth, muted by economic slowdowns in many nations, wouldn't be sufficient to offset the strong output, the EIA data indicate.
Oil inventories are enormous. When supply vastly dwarfs demand, the downward pressure on prices is inexorable. Stockpiles are at 80-year highs, and they're not draining off soon. EIA statistics show that inventories totaled just over 3 billion barrels at the end of 2015 -- and the agency projects this will climb to 3.3 billion at the end of next year.
Consultant Berman wrote that tank farms in Oklahoma and along the Gulf Coast, which account for most of U.S. storage capacity, are at 88 percent capacity. Above 80 percent, he noted, "oil prices generally fall hard."
Optimists find encouragement from another metric: The sheer amount of wells being drilled has fallen, which fuels hope that the frantic output will soon ebb. According to Baker Hughes, the oil-field services company, drillers have halved the number of oil rigs working since mid-2014.
But a harder look at the stats reveals that much of the falloff came in North America, where the U.S. rig count dropped two-thirds and Canada's by 50 percent. Elsewhere, the count was down just 24 percent, and in the Middle East -- the center of the pumping frenzy -- hardly at all.
The oil industry is shaky. When large numbers of oil exploration and production (E&P) companies are in sad shape, a sudden snapback is hard to imagine. Oil majors like BP (BP) have seen their earnings tumble, and they're slashing capital spending and shedding thousands of workers. Smaller firms, like W&T Offshore (WTI), have exhausted their bank credit lines.
The outlook is grim. Consultancy Deloitte projects that a third of E&P companies around the world are at high risk of falling into bankruptcy this year. S&P says oil and gas businesses account for a third of corporate defaults globally thus far this year. And it estimates that industry earnings per share will sink another 14 percent in 2016.
To plug their bleeding finances, many energy companies, such as Marathon Oil (MRO), are scrambling to raise money by selling more stock.
All in all, it's not a picture of health, with no near-term recovery likely. As S&P analyst Thomas Waters put it, "Oversupply and a weak world economy are not going away."