More Feel-Good News from OPEC Members Buffered by Analysts Who Doubt Resulting Rally Will Last

Thursday July 27, 2017

West Texas Intermediate on Wednesday rose 86 cents to $48.75 and Brent climbed 80 cents to $51 per barrel due to a big drop in U.S. stockpiles, and some analysts think another day of gains may indicate that traders are abandoning what they have called an overly bearish stance in the face of improving fundamentals.

Olivier Jakob, managing director for PetroMatrix, said, "The market has been tightening and the refinery margins are strong; you add geopolitical risk premium for Venezuela, and you've got a strong market."

The big news on Wednesday was delivered by the Energy Information Administration, which reported that crude inventories fell 7.2 million barrels in the week ending July 21, compared to the expected decrease of 2.6 million barrels; this is the fourth consecutive drop and said to give support to the market.

Also, gasoline and distillate stocks fell more than expected, by 1 million barrels and 1.9 million barrels respectively.

Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said, "The market has essentially been hoping and hoping for inventory draws, so that's a good thing."

Taken at face value, this adds to a week of positive news for the oil industry, on the heels of Saudi Arabia declaring it will limit oil exports to 6.6 million barrels per day (bpd) in August, down nearly 1 million bpd from a year earlier; and Nigeria agreeing to cap or cut output when it stabilizes at 1.8 million bpd.

Moreover, Kuwait on Wednesday joined the United Arab Emirates in promising to pump less oil: Kuwait Petroleum Corp. has told its U.S. customers that it will reduce contractual sales volumes of oil for 2017.

As if that's not enough, the UAE has indicated it will go beyond what it pledged to do with regards to production cuts, by cutting crude allocations by 10 percent for September; unsurprisingly, Suhail bin Mohammed al-Mazroui, that country's energy minister, tweeted that the move by state-run Abu Dhabi National Oil Co should "become a model for other NOCs (national oil companies) in OPEC and non-OPEC countries to achieve market stability."

The problem with the UAE and Kuwait's feel-good news is that it has yet to be followed through, and some analysts are especially wary of the former's sudden willingness to play ball given its poor track record of complying with the Organization of the Petroleum Exporting Countries' cutback initiative.

As for Nigeria's willingness to comply, number crunchers point out that its agreement with the cartel will allow the extra crude it's currently dumping onto the market to be accommodated and perhaps even enable the country to boost production further.

With regards to the EIA report of bigger than expected stock draws, Abhishek Kumar, senior energy analyst at Interfax Energys Global Gas Analytics, said, "Today's report has strengthened the bullish sentiment already prevailing in the market, although the longevity of the move remains in doubt.

"Nevertheless, the country's crude and gasoline stockpiles remain above their five-year averages, which will cap price gains."

To which Stephen Brennock, oil analyst for PVM, stated in a note,"Relieved bulls should be careful what they wish for. Any price rebound will only embolden U.S. shale producers at a time when rumors have started to emerge that the U.S. shale boom is slowing."

The lingering no-win sentiment that pervades the market was most recently expressed by Mike Wittner, head of oil market research at Societe Generale SA, but with regards to OPEC; he said the cartel 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."