Market Flat as Libya Reopens Oil Field And U.S. Shale Gears Up

Friday December 16, 2016

More evidence that the Organization of the Petroleum Exporting Countries (OPEC) cutback deal may have been oversold came in the form on Thursday of West Texas Intermediate losing 14 cents to settle at $50.90, its lowest close in a week, while Brent early in the session tested the $53 support level but fell as low as $53.15 per barrel before closing at $54.08, down 14 cents from its previous close.

Troy Vincent, an oil analyst at ClipperData, remarked, "We saw some buying because there is too much optimism OPEC will cut output for Brent to trade below $53."

However, other factors accounted for the losses, such as the strong dollar and reports this week that U.S. shale production is increasing (U.S. Energy Information Administration data shows that crude stockpiles at Cushing, Oklahoma, rose by 1.22 million barrels to 66.5 million in the week ended December 9).

Still, Thursday's performance caused others to discuss impending issues that promise to adversely affect the market in the near future: Audun Martinsen, vice president for oilfield service research at Rystad Energy, told CNBC that, " you need to go back to the '80s to see three consecutive years of investment cuts."

An equally troublesome, but hardly unexpected, development is Libya, one of several OPEC members not bound by the cartel's cutback agreement: its National Oil Corporation (NOC) has vowed to raise production to 900,000 barrels per day (bpd) in the near future and to 1.1 million bpd next year, giving further credence to analysts' worries that the cutback agreement, even if fully implemented, will affect the global glut enough to cause a significant market rebalance.

Even though news on Thursday that a restart of production from the major oil fields of Shartata and El Feel (whose pipelines had been blockaded by tribal leaders) has been delayed, word is that negotiations have led to an agreement to re-open the pipelines, and that output is expected to be gradual, if fragile.

El Sharara is a joint venture between the NOC and Spain's Repsol, with a production capacity of about 370,000 bpd; El Feel is run by the NOC and Italy's ENI with a capacity of about 58,000 bpd.

The recent market declines have caused a resurgence of old criticism against the OPEC cutback, with Sammy Six, senior oil market analyst at S&P Global Platts, noting only a day ago that "Going forward, I think there's a lot of potential for countries not to adhere to their output cuts."

He added that current record production is an attempt to cut "at the highest possible levels," and believes oil will stay in the $55-$60 range until there's more data on actual production and export in 2017.