Oil prices were nearly unchanged last week as the Opec and IEA monthly reports gave mixed set of signals. While the compliance to output cuts has been nearly 100 per cent from the Opec side, relative non-compliance of Non-Opec coupled with steadily climbing US production is keeping prices under pressure.
There is also disparity between official Opec supply data and secondary source data which makes it difficult to gauge the extent of supply cuts. US rig count has been increasing for nine consecutive weeks and latest forecasts show that US shale output will continue to inch higher in April. We believe that the overhang of inventories globally will keep prices under pressure in the near term.
Evidently, WTI prices remain below the psychological $50 mark as oversupply worries continue to dent sentiment. Opec producers have implemented 100 per cent of the agreed cuts as per latest data with Opec figures reflecting a cut higher than expected. Opec’s 11 members with supply targets cut output to 29.68 million bpd in February, 123,000 bpd more than required by target. Production by all Opec members, including cut-exempted Nigeria and Libya, fell to 31.95 million bpd. Surprisingly, Saudi Arabia raised oil production to 10.01 million bpd from 9.74 million bpd in Jan. It however clarified that that the excess production went into stockpiles and that it intends to stick to its deal. While Saudi’s output is still lower than its target, a rebound in its production dented sentiment in the oil market.
The IEA was slightly more bullish in its forecast as it projects the market to attain a deficit in H1 unlike Opec which expects that to happen in the second half of this year. Both however expect the Non-Opec output to rebound this year. Opec raised its 2017 Non-Opec oil supply growth forecast to 0.4 mbpd (prev. forecast 0.24 mbpd rise). The IEA also expects non-Opec output to rise 0.4 mbpd to 58.1 mbpd in 2017.
The non-Opec part of global supply is the bigger worry for the market at the moment. Russia hasn’t cut output as per the agreed terms with February production unchanged from January at 11.1 mbpd. Overall non-Opec compliance has been also been a concern with some estimates suggesting only ~64 per cent compliance so far. Meanwhile, given that Libya and Nigeria are exempt from cuts, a rebound in their production will increase Opec output even if other members stick to their quotas. Brazil’s oil exports also have been climbing with February exports at a record 1.63 mbpd. Brazil is not a part of the non-Opec group that agreed to production cuts.
The bigger headwind to prices is also the re-emergence of shale output. US oil rig count has been increasing since June and is now at its highest since September 2015. Weekly data from EIA shows that US oil production is ~9.1 million bpd and latest EIA forecasts show that oil production could average 9.2 million bpd this year. EIA forecasts show that US shale oil production is expected to rise again in April by 109,000 bpd to 4.96 million bpd suggesting that shale is surely making a comeback at this level of oil prices.
On the inventory side, it remains to be seen if reduced Opec supply leads to significant inventory drawdown in the coming months. We haven’t seen any signs of a drawdown in global inventories so far this year and this is a big risk going forward too. IEA data showed that crude stocks in the OECD nations rose in January for the first time since July by 48 million barrels to 3.03 billion barrels. This is more than 300 million barrels above the five-year average. Read more
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