Crude Jumps After OPEC Members Reaffirm Commitment to Cutbacks

Analysts warn that the numbers bandied about during this week's meeting of members actually pave the way for more excess.

Once again based on promises that upon cursory examination aren't all they seem, traders on Tuesday caused West Texas Intermediate to jump $2.11 to $48.45 per barrel and Brent to escalate  $2.11 to $50.71, on the strength of  several factors, one being Saudi Arabia's vow to limit its crude exports in August to almost 1 million barrels per day (bpd) below year ago levels.

The gains were also a reaction to U.S. crude inventories falling by 10.2 million barrels in the week ending July 21 to 487 million, according to the American Petroleum Institute, compared with expectations for a decrease of 2.6 million barrels.

Saudi Arabia made its pledge to limit crude exports to 6.6 million bpd in August in the midst of a meeting this week of the Organization of the Petroleum Exporting Countries (OPEC) and some non-members, which also saw Nigeria voluntarily agreeing to join the cartel's extended crude cutback deal by capping or cutting its output from 1.8 million bpd, once it stabilizes at that level.

But the production ceiling identified by OPEC for Nigeria doesn't mean the country will cut its current levels of output, said Vandana Hari, founder and CEO of Vanda Insight: "The problem with that is Nigeria and Libya, nearly 600,000 barrels per day extra that they've been pumping compared to where they were last October have already been eating into the cuts being made by OPEC and non OPEC; and the numbers being discussed as a ceiling for those countries do not imply a cut from where they are.

"In fact, not only will those numbers accept the extra they've been pumping, but even make room for about 300,000 barrels per day according to our calculations that they can pump even more."

As for compliance, Hari said, "the numbers mask the fact that a lot of the heavy lifting is being done by Saudi Arabia...six out of the 11 [OPEC] countries" have a sketchy record.

One member with a notably sketchy record, the United Arab Emirates, reiterated its commitment to the OPEC cuts during the cartel's meeting and promised to deepen its own curbs (to date it has only implemented 54 percent of its promised 139,000 bpd cut).

Meanwhile, OPEC's monitoring committee did not back capping Libyan output, on the grounds its production was unlikely to exceed 1 million bpd in the near future compared to its capacity of 1.4 million-1.6 million bpd before  2011.

Few if any analysts were swayed by the feel-good outcome of the OPEC meeting: "In our view ... these meetings were aimed at saving face and diverting the market's attention away from Iraq's poor compliance, shale's resilience, and Libya's and Nigeria's markedly higher output," Barclays said.

Still, some analysts found cause for cheer in data suggesting the low oil prices may finally be taking a toll on U.S. shale production: Mark Watkins, regional investment manager at U.S. Bank, told Reuters, "Companies are not drilling as fast as they had been in the beginning of 2017; they're not producing as much because it's much less profitable with prices in the low $40s."

This coincides with Halliburton Co. on Monday warning that explorers are "tapping the brakes" on drilling and Anadarko Petroleum Corp. saying it's trimming spending in the first earnings report this quarter.

At this stage, it is unlikely that any news from OPEC will sway the analytical community and cause any market shift other than a temporary uptick: Mike Wittner, head of oil market research at Societe Generale SA, recently summed up the problem by stating that OPEC is "between a rock and a hard place: the bottom line is [the output reduction agreement] hasn't worked" and "if they cut more, the more they support prices, the more they support U.S. production."