Weak oil may spur production cut extension

 12 May 2017 - 22:40

The Peninsula

Acontinued concern about oil price weakness is likely to spur extension of Opec’s production cuts. Opec’s ability to bring down historically high global crude stocks in the face of rising US crude production continued to negatively affect market sentiment in April, NBK noted in its  ‘economic update’.
“Oil prices endured another month of pressure, closing April down by more than 2 percent to $51.73 per barrel (bbl) and $49.33/bbl, in the case of Brent and WTI, respectively.  Prices are down by almost 9 percent on average so far this year as the unwinding of the crude stock overhang appears to be taking longer than many, including Opec itself, had anticipated”, NBK analysts said.
In view of the slower-than-expected pace of global crude stock drawdowns, talk of extending the output cuts beyond June, when the 6- month agreement is due to expire, has gathered momentum. OECD commercial crude and petroleum inventories, a proxy for global crude and products stocks were, at 3.05 billion barrels in February, still more than 300 million barrels above Opec’s target 5-year average level. According to the International Energy Agency (IEA), which compiles the data, OECD commercial inventories fell by 9.2 million barrels in February. This would have heartened the markets (and Opec) more than it actually did in mid-April were it not for the fact that the drawdown was largely in petroleum products stocks  rather than crude stocks, and were it not for the fact that it was largely non-US based.
In the US, crude stocks actually increased in February and March, before declining for three consecutive weeks in April. The weekly data came courtesy of the US Energy Information Administration (EIA) rather than the IEA, but the trend was the same: the surplus was shifting from crude stocks into petroleum products stocks.
According to NBK research note, oil prices are at the mercy of developments in the US oil sector . Developments in the US oil sector tend to exert an outsized influence on the oil markets. While this is partly a result of the US’s newfound status as a swing producer, thanks to the special dynamics of light tight oil or shale production.
“Were Opec and non-Opec oil producers to extend their agreement beyond June, as seems likely, then by most estimates the market should tighten significantly and global stocks should decline more rapidly. Indeed, according to the IEA’s oil demand and supply figures, the oil market has already entered a state of undersupply”, NBK said.