Crude Climbs Despite Surging U.S. Output

Monday May 14, 2018

The Organization of the Petroleum Exporting Countries (OPEC) on Monday stated that U.S. oil drillers are pumping a record 10.7 million barrels per day (bpd) and will account for most of the growth in oil production this year - but that didn't stop Brent crude from making its best close since November of 2014.

West Texas Intermediate on Monday settled up 26 cents to $70.96 per barrel, while Brent ended the trading day up $1.11 to $78.23.

The cause for the gains was also said to be OPEC, which in its latest monthly report claimed the global oil glut has been virtually eliminated and members are still trimming output more than they are required to do so, despite Venezuelan production at its lowest in decades.

Also supporting prices was news from Genscape  that inventories at Cushing, Oklahoma (the delivery point for U.S. crude futures) fell more than more than 400,000 barrels in the week to May 11.

But the OPEC report contains considerable points of concern, with the cartel warning that global economic growth is uncertain, due partly to U.S. trade policy and sanctions; it raised its forecast for global oil demand in 2018 just slightly, to 98.85 million bpd, up 1.65 million bpd from last year.

It stated with regards to purchase managers indexes in major economies for April being mostly weak., "Major emerging economies' growth dynamics have thus far counterbalanced this soft spot, and global growth may recover in the remainder of the year due to U.S. fiscal stimulus and a rebound in OECD growth.

"However, after a period of a considerable growth, uncertainties seem to be on the rise."

Also, OPEC admitted that its members overly complying with cutback quotas, the group's production was still up slightly in April by about 12,000 bpd to 31.93 million bpd.

If OPEC was insinuating that circumstances could conspire to negatively impact prices in the foreseeable future, that would presumably please Richard Gorry, managing director at JBC Asia.

Gorry told Bloomberg that oil prices should be $6 to $7 cheaper than it currently is, because "if you look at it from a fundamentals perspective, we've got plenty of supply....we have growing shale oil in the United States and plenty of new projects coming in."

He went on to note that "geopolitical tensions have been mounting in recent weeks and we have seen this geopolitical premium reach a sizeable size."

When he was reminded that shale was supposed to be the swing producer that would keep a lid on oil prices, Gorry replied that "I think the market is just very sensitive to the geopolitical news right now" and that the market is also flooded with speculative money.

OPEC's concern over possible waning demand seems to throw a monkey wrench into the latest analytical line of thought most recently expressed by Citigroup, Bloomberg, and BMO - all of whom view crude prices on the rise due to the U.S. pulling out of the Iran nuclear deal and other circumstances leading to a tight market.