Oil prices improve over signs of fall in USA output

Frederick Owens
July 17, 2017

While oil rallied this week, prices in NY have lingered below US$50 per barrel amid concerns that elevated global supplies will offset cuts by OPEC and its partners as part of a deal to help rebalance the market. Given that most of the bearish triggers have been baked into prices, the bounce in oil prices could extend further this week.

"The oil rig count only rose by two - yet prices would have responded negatively to this just a few weeks ago".

The International Energy Agency (IEA) said that demand is climbing faster than initially estimated and the United States government reported declining stockpiles last week.

Expectations that a long-awaited crude market rebalancing was under way was also bolstered by the sharp drop in US crude inventories in the week to July 7. Still, there are still no visible signs of tightness in the market. The increased production in the US and an increase in the numbers of operating rigs remain as one of the biggest of concerns for the oil bulls. OPEC members did not exactly cheat, but some of them were slow to reduce their output as agreed. Equatorial Guinea, which became an OPEC member in May, also resulted in the OPEC output increase by 0.15 mbpd.

If that were the case, then any sort of agreed upon reduction in production would have a limited, if any, effect on the global supply of oil, as an effective production cut would necessitate all or at least a large majority of USA shale producers agreeing to it. The IEA sees Non-OPEC supply growth of 1.4 mbpd next year compared to demand growth of 1.4 mbpd.

Option two is perhaps even worse than the others: an OPEC insider, Qatar's ex-Oil Minister Abdullah al-Attiyah, told Bloomberg that deeper cuts will only benefit US shale boomers, and would not benefit OPEC. In last week, there was an increase of 2 operating rigs in the U.S., pushing the total number to 765, the highest since April 2015.

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Weekly data from EIA shows that total U.S. oil production is close to 9.4 million bpd, the highest since August 2015. The Secretary General of OPEC, Mohammad Barkindo, stated on July 12 that this meeting "has broken the ice in reaching out to shale producers in the U.S". And, of course, Russian Federation got the better end of the bargain, agreeing to a puny 300,000 bpd reduction-and a gradual one at that-from its record-high October daily production rates, while Saudi Arabia had to shoulder a burden of about half a million bpd. Then the oil price slide began-hesitant at first, and then steadier as the months went by.

The price action the rest of the week should be determined by the American Petroleum Institute's (API) report on Tuesday and the U.S. Energy Information's inventories report on Wednesday. Gasoline demand inched up to 9.78 mbpd from 9.70 mbpd which led to stocks declining by 1.6 million barrels.

Chinese crude oil imports improved. Also, the enforcement of the agreement that aims at reducing global oil production by 1.2 million bpd between January 2017 and March 2018 would be more random than expected - in particular on behalf of Russia - Middle Eastern sources said.

Oil prices edged higher on July 14 and were on track for solid weekly gains following positive demand signals, production issues in Nigeria and a reported decline in stocks.

On the whole, given the selloff in the recent months, we mentioned last week that some short-covering was on the anvil.

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