Americas News
More Concern About Undersupplied Crude Market in Wake of OPEC Achieving 128 Percent Cutback Compliance
A Reuters survey showing that the Organization of the Petroleum Exporting Countries' (OPEC) compliance with its crude output reduction deal rose to 128 percent in December - but even though this is precisely what analysts insisted needed to happen in order for global supply-demand ratio to return to a healthy balance, they now worry that inventories will be too low later this year.
Amrita Sen, chief oil market analyst at Energy Aspects, told Bloomberg television that thanks to OPEC's cutback efforts in 2017 "we've had a pretty significant increase in prices all the way through Christmas and the New Year."
But she went on to say that "I think the challenges really come through in the second half of the year, because inventory overhang for all intents and purposes has drawn down; there's not really that much left, and I would think if our balances are right, and so far they have been.....we shouldn't see any inventory overhang left, and then what happens in the second half is interesting: do they [OPEC] continue with the cuts, do they slowly raise production?
"Because the market is tightening, and it's tightening very quickly."
Sen also noted that demand "is very strong right now and it's really broad based: China is still doing very well right now....the standouts have still been the OECD countries and of course Europe," and she added that Latin American countries "are finally starting to pick up again.
"So there's a lot of upside risk to oil this year, which I think the market is underestimating."
For the record, the Reuters survey showed that the United Arab Emirates for the first time pumped below its OPEC target, joining Saudi Arabia and Kuwait; perhaps more importantly, the survey showed no sign of producers boosting output to take advantage of higher prices or replace the decline in Venezuela, where output is dropping.
However, while media is portraying the survey as evidence that OPEC members are strongly committed to reducing its output, a good many of the declines can be attributed to unforeseen problems and not any willingness to abide by the cartel's rules, case in point: Libya, whose output in December slipped by 30,000 barrels per day (bpd) due to a pipeline outage.
Moreover, the survey shows rises in December output from a variety of countries, including Nigeria (said to be close to a 21-month high; Iraq (which achieved a record 3.55 million bpd last month); and Algeria, which in December bounced back after reduced output due to oilfield maintenance.
Taken in this context, it could be argued that OPEC in 2018 is in fact shaping up to have the same amount of cutback cheaters that impacted its efficacy in 2017 and caused it to extend its reduction deal through this year.
And if the cheating continues, then Sen's worry of a tightening market may not come to pass at all, especially when one factors in U.S. shale continuing its pursuit of energy independence by pumping full out this year.
As if to herald what might really take place later this year, and again contrary to Sen's concerns, U.S. production rose to 9.78 million bpd in the latest week according to the Energy Information Administration - and this plus weaker refined products demand caused West Texas Intermediate on Friday to drop 57 cents to $62.21 and Brent to fall 45 cents to $67.62 per barrel.
Norbert Rucker, analyst for Julius Baer, said crude prices above $60 project an "overly rosy picture" and explained that "Oil production disruptions (in Iran) remain a very distant threat ...Disruptions in the North Sea have been removed with the Forties Pipeline system having resumed full operations; U.S. oil production surpassed the 2015 highs in October and is set to climb to historic highs this year."
Sen is not alone in her worry over a potentially dry second half of 2018: earlier this week, John Kemp, market analyst for Reuters, wrote that OPEC "is more likely to tighten the oil market too much and allow prices to overshoot on the upside rather than relax production cuts too early and risk prices falling back."
