• Global Crude Oil Rebalancing And The Producers’ Accord

    Crude oil prices plummeted from more than US$110 per barrel in the second quarter of 2014 to just above US$26 per barrel in the first quarter of 2016. This was due to massive supply additions by tight oil producers followed by ramp-ups by major producer-countries such as Saudi Arabia and Russia. The global crude oil imbalance ─ excess of supply over demand ─ exceeded a staggering 2 million barrels per day (bpd) by the second quarter of 2015, exerting downward pressures on prices. Market speculations about the necessary trigger for a global rebalancing grew rife. Large supply outages early last year, which bore such ascription proved false.

    With proceeds buffeted by a protracted low-price regime, major oil-producing countries ─ excluding the United States ─ agreed late last year to cut production, effective January 2017 and rein-in the supply overhang. The agreement provided for a total supply cut of 1.8 million bpd for the first six months of 2017 with the option of a rollover for a further six months. The Organization of the Petroleum Exporting Countries, OPEC ─ excluding Nigeria and Libya, both of which had and still have issues of domestic unrest ─ agreed to a supply cut of 1.2 million bpd while for the eleven non-OPEC countries, the agreed cut was 600,000 bpd.

    For both investors and analysts alike, three issues underscore concerns about the accord’s capacity to rebalance the global oil market:

    First, a record of breaches of assigned production quotas among OPEC members; second, the lack of an effective mechanism for enforcement of such production quotas; and finally, the effect on prices, of rebounding production, especially among the nimbler United States shale producers.

    It is really no secret that some OPEC countries have often violated their production quotas with little or no effective sanctions applied. A report by World Oil for example, showed that even with a supply reduction agreement in place, crude oil shipments by OPEC member Iraq, increased during the first 15 days of February by 122,000 bpd over the average for January. While this could be counterbalanced by reductions in subsequent months, it only accentuates concerns about compliance.

    However, due perhaps to the magnitude of the afore-mentioned slump in proceeds, the compliance rate for OPEC under that November accord was high for the first month. Per a report by Argus, the group reduced output by 1.14 million bpd out of the agreed target of 1.17 million bpd (a 97% compliance rate) between December 2016 and January 2017; Saudi Arabia exceeded its agreed reduction quota by 16%. For non-OPEC members, that rate was less than 50%. That said, whether a significant compliance rate among the groups can be sustained, remains to be seen.
    Continue reading  Post ID 546

  • Crude Oil Prices And An Uncertain Rebalancing

    Crude Oil Prices

    The rise in crude oil prices from twelve-year lows seen in the first quarter of the year led many analysts to project a complete oil market rebalancing between 4Q 2016 and 3Q 2017. Investment bankers Goldman Sachs Group Inc. as well as the Saudi Arabian government, the world’s largest-volume oil exporter had earlier declared the crude oil glut over and announced the beginning of a market rebalancing. With oil (technically) entering a bear market on Monday, those projections may have been a little hasty. However, analysts at the Paris-based intergovernmental organization, International Energy Agency (IEA), as well as bankers Barclays Plc, Citigroup Inc. and Société Générale SA, have expressed confidence that the rebalancing is on track.

    False Re-balancing

    Contrary to declarations, that “rebalancing” of the oil market never really began. Global oil imbalance ― excess of supply over demand ― grew steadily from 1Q 2014 through 2Q 2015 even as demand was increasing.

    The unplanned supply outages in Canada (wildfires), Nigeria (militancy), and Libya (factional discord) among others in the early part of the year sent about 3.5 million barrels per day (bpd) of oil supply offline. This led to a decline in imbalance, which was mistaken for the significant cut in supply deemed necessary for a rebalancing of the market. Most of that outage has since been brought back on-stream.

    Crude oil demand fell by 510,000 bpd between 3Q 2015 and 1Q 2016 according to IEA data and is likely to continue in that trajectory over the next few months. Global crude oil and product storage facilities are currently bloated. In the U.S., crude oil inventories are well above the five-year average range while gasoline and other product stocks stand at multi-seasonal highs. Continue reading  Post ID 530

  • Why Some Investors Are Betting On An Oil Price Shock

    The global crude oil glut ― driven principally by the dueling spigots of U.S. tight oil producers and those of Organization of the Petroleum Exporting Countries ― has diminished somewhat. However, stockpiles in the U.S., which consumes more crude oil than any other country, remain well above the five-year range.  In addition, inventories of products such as gasoline stand at multi-seasonal highs, with the likelihood of a pullback in throughput by refiners. Concerns about weak fundamentals saw money managers and speculators, in the week to July 26, holding a record (dating back to 2006) net-short position on NYMEX-traded gasoline, Reuters reports.

    While money managers and other investors also reduced their net-long positions on NYMEX West Texas Intermediate crude to a near five-month low, some independents are betting on a crude oil spike in the mid-term; and there may be justification for that.

    Oil Prices

    Front month September contracts for the international benchmarks Brent and West Texas Intermediate (WTI) settled at US$42.46/bbl and US$41.60/bbl respectively, 29 July. That settlement price for Brent was down 14.5% for the month, the largest monthly drop in about six months; for WTI the price was down 14% for the month, the largest in about twelve months.

    The low price regime is driven in the main, by a massive inventory of crude oil and refined products, as well as a sluggish demand. According to data from International Energy Agency, IEA, global crude oil demand declined by 510,000 barrels per day (bpd) between 3Q 2015 and 1Q 2016. Many industry analysts have projected a market re-balancing in 2017, but any oil price rebound is likely to be sluggish.

    World Oil Supply, Demand Continue reading  Post ID 520