US Crude Nears 4 Month Low as Experts Say Prospects of OPEC Extending Production Cuts are Remote at Best

by Ship & Bunker News Team
Wednesday March 22, 2017

Despite Organization of the Petroleum Exporting Countries (OPEC) members loosely conceding that an extension of their production cutback is necessary to bolster prices and put a dent in the global glut, the analytical community has declared the idea to be dead in the water.

Phil Davis, managing partner at PSW Investments, told CNBC on Tuesday that "OPEC is sticking with a plan that has not worked," adding that the cartel hasn't officially expressed an intent to extend cutbacks beyond the June expiry date, and no new countries are pitching in to help.

Meanwhile, Commerzbank stated in a note that it would be unwise for investors to "pin their hopes" on an extension, pointing out that "it is very unlikely that Russia will actively take part in any extension of the production cuts that goes beyond paying lip service to the agreement."

Andy Lipow, president of Lipow Oil Associates, suggested in a CNBC editorial that the only way prices can rise substantially is if the International Energy Agency is proven correct in forecasting that a 1.4 million barrel per day (bpd) demand increase will occur this year and "soak up the surplus."

He went on to explain that current prices are just fine for U.S. shale producers who have "figured out the technology to get our costs down and...get more oil out of the ground"; while he doesn't discount the prospect of oil rising to $60 on the back of a geopolitical event, he predicts that West Texas Intermediate prices will stay at the $55 mark "come January 2018."

The question is, how likely is a demand increase of this magnitude?

Jeremy Baker, senior commodity strategist at Vontobel Asset Management, seems to think the chances are very good: he told Reuters, "Global demand for 2017 is expected to remain healthy and surpass long-term average growth in demand of 1.2 million bpd by between 0.2 and 0.4 million bpd.

"As such, the combination of robust demand and weaker global supply leading to rebalanced markets will not be derailed by U.S. shale oil."

Baker said this would "support the case for a shift from contango to backwardation in the crude markets during the second-half 2017."

For the time being, Tuesday was yet another dismal day for crude, with WTI settling down 88 cents to $47.34, its lowest settle since November 29; Brent was down 60 cents at $51.02 per barrel.

The latest declines come in advance of weekly U.S. crude inventory data later this week that is expected to show a crude stock build of 2.6 million barrels.

Earlier this week, six OPEC sources told Reuters that the cartel needs to extend its reductions beyond the June deadline and perhaps make even deeper cuts in order to positively impact the global oil glut.

One of the sources stated, "The ministers will meet in May to decide, but everyone has to be on board."