Crude Plunges Yet Again as Saudis Report Uptick in February Output

by Ship & Bunker News Team
Wednesday March 15, 2017

Although Saudi Arabia produced 10.01 million barrels per day (bpd) of crude in February compared to 9.87 million bpd in January according to the latest Organization of the Petroleum Exporting Countries (OPEC) monthly report, the kingdom's commitment to reducing output - especially compared to other members - has caused the cartel's harshest critic to give it a pass.

Suggesting the rise in production is likely the result of a rebound in internal demand, and noting that 10.01 million bpd is still within the limit of the cutback agreement, John Kilduff, founding partner of Again Capital, stated, "If the Saudis are saying it, we take them at their word.

"They're probably the only ones you can believe when it comes to self-reporting."

Still, the rise combined with OPEC disclosing that oil held in storage in the Organization for Economic Co-operation and Development rose in January to more than 3 billion barrels, above the five-year average, was followed by more market losses on Tuesday.

West Texas Intermediate fell 68 cents to $47.72, the lowest level since November 29; Brent dropped 43 cents to $50.92 per barrel.

And although Bloomberg said a preview of an American Petroleum Institute report shows that U.S. inventories unexpectedly declined by 531,000 barrels last week, Michael Tran, a commodities strategist at RBC Capital Markets, echoed the sentiments of many experts by stating, "What we've seen is U.S. production grow significantly over the past several months [and] it certainly doesn't help sentiment when many U.S. shale producers were seemingly giving high-fives last week" at the CERAWeek conference in Houston.

Moreover, unlike Kilduff, other analysts are refusing to take the Saudi February increase as a passing blip on the radar: Bob Pisani, editor of CNBC On-Air-Stocks, called the kingdom's explanation for the rise (operational factors influenced by storage adjustments and other variables) "official gobbledygook."

He said, "the market clearly believes that there are cracks in the Saudi commitment to the production cut deal."

Pisani added that the Saudis may have a motivation for walking away from the OPEC cutbacks in addition to other members not living up to the agreement: "The Saudis certainly are willing to sacrifice market share by cutting production, providing it will prop up oil prices and lead to a higher valuation for Aramco, which is scheduled to go public next year.

"But look what's happening: the Saudis are sacrificing by cutting production, and oil prices are still going down ... seen in this light, it would make perfect sense if the Saudis started to question the wisdom of continuing with production cuts."

Despite Kilduff taking a moderate view of Saudi's February production figures, he too thinks it's not much of a stretch to forecast their departure from the OPEC agreement: earlier this week he stated that their "patience has been tried, and they have come to realize that their efforts have only served to resuscitate the U.S. shale competition, which is increasingly taking the battle for global market share to OPEC."