Oil Market Rebalance Not So Imminent, says OPEC, Blaming U.S. Shale, Libya, and Nigeria for Rising Output

CNBC host says tepid 2017 demand rates will make rebalancing impossible.

After basing the legitimacy of its initial crude cutback initiative, and more recently its extension, on the argument that it was resulting in an imminent market rebalance, the Organization of the Petroleum Exporting Countries (OPEC) on Tuesday admitted that the recovery is now underway at a "slower pace" - and that the cartel's output in May increased due to Nigeria and Libya being exempt from the deal.

The disclosures were made in OPEC's latest monthly report, which reveals that output rose by 336,000 barrels per day (bpd) in May to 32.14 million bpd, more than its forecast of average global demand for its crude in 2017; this is despite Saudi Arabia, which voluntarily cut production below its target during the initial cutback, lowering output again in May by about 66,000 bpd to 9.88 million bpd.

The report also noted that oil stocks in industrialized nations fell in April but are still 251 million barrels above the five-year average.

OPEC stated, "The rebalancing of the market is under way, but at a slower pace, given the changes in fundamentals since December, especially the shift in U.S. supply from an expected contraction to positive growth."

The news prompted Jackie DeAngelis, host of CNBC's Squawk Box, to remark, "We are supposed to be in a cutting period here, so the cheating has begun; the biggest offenders are not a surprise: Libya, Iraq, Nigeria, and here in the U.S. there is also a projected increase."

Indeed, the U.S. Energy Information Administration reports that shale production will jump again in July by 127,000 bpd to 5.5 million bpd, with the biggest gains coming from the Permian basin in west Texas.

DeAngelis added that the anticipated 1 million bpd demand for the rest of this year "is not enough [to balance the market] given the boost we're seeing here."

But in what would presumably be a positive development for OPEC, a Reuters analysis of hedging disclosures by the 30 largest U.S. shale companies shows that most stayed on the sidelines in the first three months of this year, compared to a year ago when they rushed to lock in prices even though oil was trading $15 per barrel lower.

Rob Thummel, a portfolio manager at Tortoise Capital Advisors LLC, said, "Producers are working in an environment where they see service cost increases on the horizon; they see their expenses going up, but their revenues are not going up correspondingly, which is why they do not want to hedge and compress their margins."

Michael Tran, director of global energy strategy at RBC Capital Markets, says prices are too low now for producers to lock in large volumes of future production, and pent-up demand for hedging will pressure any moves higher in the oil market.

Last week, Martijn Rats, oil strategist at Morgan Stanley, called 2018's outlook "troublesome" because U.S. crude production is expected to average a record of over 10 million bpd.