IEA Says U.S. Growth May Spoil OPEC's Achievement of Market Rebalance - But Investors Wary of U.S. Sustainability

Wednesday February 14, 2018

Once more, the U.S., in its bid to become energy independent (a goal once lauded by western analysts) is being portrayed as the heavy for its shale output growth threatening to spoil a rebalance of global supply and demand, which the International Energy Agency believes is imminent.

However, Goldman Sachs thinks the oil market is "unconvinced" that U.S. producer discipline can be sustained over the long term.

The IEA, in praising the Organization of the Petroleum Exporting Countries (OPEC) for having almost achieved its goal of clearing the global crude glut via cutbacks, stated that the resulting increase in prices to a three-year high is triggering more supply from America.

The agency acknowledged the U.S.'s growing global dominance by noting that shipment of U.S. condensate recently arrived in the United Arab Emirates:"Such a development would have seemed incredible a few years ago, now it looks like the shape of things to come."

However, this could prompt a shift in OPEC policy, in order to satisfy members "currently sitting on shut-in capacity" and who want to regain their market share, according to the IEA.

The agency added that having cut costs over the past three years, U.S. shale companies are able to deliver even more oil because recovering prices fund new drilling; it concluded that the "main message" is that "fast-rising production in non-OPEC countries, led by the U.S., is likely to grow more than demand."

Stephen Brennock, oil analyst at PVM Oil Associates, said in a research note Wednesday that "Few can dispute that 2017 belonged to OPEC after it successfully reasserted its pricing influence over the oil market; this year, however, its production curbs will increasingly have to make do with playing second fiddle to a Texas-sized wave of U.S. shale growth."

Brennock agreed with the IEA's outlook by stating, "Even though oil stocks are forecast to draw this year, non-OPEC growth supply will still exceed the growth in global oil demand; this is hardly a supportive environment and is not conducive to a sustained price recovery."

That may well prove to be the case, but in analyzing the sentiments of crude market players, Goldman Sachs says despite the seemingly invincible might of the U.S., investors are reportedly unsure about several factors propelling the recent price rally such as U.S. producer discipline, healthy global demand, and supply disruptions.

Goldman said in a research note, "Most importantly, investors remain unconvinced U.S. producer discipline will hold.

"That supply growth needs to be constrained voluntarily, even in the face of a more constructive demand outlook [that] still leaves investors more focused on other metals and mining, where there is greater confidence in China policy-driven supply constraints."

At a time when everything involving the U.S. is suspect, it's probably not a surprise that OPEC is placing faith in Russia - a country whose producers are chomping at the bit to boost output - not flooding the market with crude.

Mohammed Barkindo, secretary general for the cartel, told reporters this week that  "I have heard and received assurances both from [energy minister] Alexander Novak and president Vladimir Putin that they will remain committed to the OPEC, non-OPEC collaboration and the Declaration of Cooperation.

"They have proved this beyond any reasonable doubt through their high level of conformity to their supply adjustment, so I think there's no concern here; we are all in the same boat."

Interestingly, while discussing his desire to establish a long-term relationship with OPEC and Saudi Arabia, Novak repeatedly stated that Russia is committed to exiting OPEC's cutback deal gradually and not do anything to disturb the market rebalance - however, he said that "technically, Russia can ramp up production quickly" once the agreement ends, as the country has accumulated significant spare capacity.

As is the case with many OPEC members and supporters, Russia's portrayal as a defender of moderation in the crude market is questionable, considering its production continued to grow last year as OPEC struggled to achieve cutback compliance, with average daily output at a 30-year high of 10.98 million barrels per day.