More Losses for Crude Come Amid Renewed Speculation that OPEC May Get Tough on Nigeria, Libya

Friday July 7, 2017

Following disclosures that Saudi Arabian exports of crude have been rising, exports by the Organization of the Petroleum Exporting Countries (OPEC) have reportedly hit a 2017 high, and this was enough to continue the crude market's latest losing streak on Friday, with West Texas Intermediate dropping $1.29 to $44.23 and Brent dropping $1.40 to $46.71 per barrel.

Both benchmarks posted a sixth weekly decline in the past seven weeks: WTI is down 3.9 percent on the week, and Brent is down 2.5 percent.

Matt Smith, director of commodity research at Clipperdata, noted that OPEC exports were 2 million barrels per day (bpd) higher in June than in 2016, despite the cartel undertaking the extension of its 1.8 million bpd production cut: "We've seen exports last month from OPEC much stronger than they were in April and May, seemingly indifferent to the OPEC production cut deal."

While this almost certainly will contribute to the global glut and depressed prices - Morgan Stanley expects WTI  to remain below $50 until mid-2018 - it won't necessary slow the growth of U.S. shale, which, despite persistent forecasts that its peak growth is over, is winning considerable support from traders.

Bloomberg reports that Trafigura Group Pte., Mercuria Energy Group Ltd., Vitol Group, and other European traders have invested in U.S. infrastructure and made deals to secure oil and gas flows, and independent consultant Jean-Francois Lambert calls shale "the new reality" that "brings more optionality for oil trading and this is exactly what traders need."

Trafigura alone announced an agreement this week with Plains All American Pipeline LP to receive as much as 100,000 bpd of crude and light oil  the Permian basin, and Vitol expects its shipments to rise, with shale production increasing by 600,000 to 700,000 bpd through December.

With no real sign of shale's downfall apart from speculation, OPEC is said to be considering the once unthinkable: production caps for Libya and Nigeria, which so far have been exempt from the cutback deal.

Cartel delegates told MarketWatch that their organization is indeed mulling over limits, with one remarking, "Nigeria is definitely becoming a worry for us."

Indeed, many experts say now is the time for OPEC to act firmly and decisively: Amrita Sen, chief oil analyst at Energy Aspects Ltd., told BloombergMarkets, "For some time we've been saying OPEC needs to step up; Saudi Arabia's exports were up in June, and this is not what the market wants to see at all.

"Exports need to come down further."

For her part, Helima Croft, head of commodity strategy at RBC Capital Markets LLC, doesn't think that will happen - at least, not as far as the Saudis are concerned: "I just have the sense that [Saudi oil minister] Khalid al-Falih thinks he has done enough and has a different timeline."

As if to gird for a scenario in which the global glut will continue despite best efforts, an evolving new mindset came to light earlier this week with analysts such as Dan Yergin, vice chairman of IHS Markit and Alexander Novak, energy minister of Russia suggesting that crude in the $50s is "fair" value for oil and the new norm.