This opinion piece presents the opinions of the author.
Ahead of Wednesday morning’s inventory data release from the Energy Information Agency (EIA), crude prices hit a three-week low off growing sentiment that an effective deal to curb production among the Organization of Petroleum Export Countries (OPEC) and Russia was becoming less and less likely.
The market was anticipating a build in U.S. crude inventories after the American Petroleum Institute (API) reported after the market close Tuesday its estimates for the week ending Oct. 21. It showed an increase of 4.8 million barrels to oil stocks.
The EIA data, however, showed a surprise decrease to crude inventories, of about 600,000 barrels, which helped oil prices move above the $50 per barrel level in early trading. With the seasonal refinery maintenance period in effect, utilization rates normally fall, which leads to an increase in crude stocks. The market had been expecting a build in crude stocks of around 2 million barrels.
The front-month WTI contract settled down 1.56 percent Wednesday on the NYMEX at $49.18 per barrel, while the Brent front-month contract fell 1.59 percent on the ICE to $49.98 per barrel.
For the week ending Oct. 21, the EIA reported that the U.S. refinery utilization rate rose .6 percent week over week to 85.6 percent. The EIA also reported that gasoline stocks fell 2 million barrels, and distillate (including diesel and heating oil) decreased 3.4 million barrels.
Looking past the headline numbers from the EIA data release, which showed bullish signals, such as inventory drawdowns as well as growth in demand for refined products (during the previous four-week period, consumption was up 4.3 percent over 2015 levels), stocks still remain historically high. Additionally, U.S. crude production grew by 40,000 barrels per day for the week ending Oct. 21, and remains at a steady 8.5 million barrels per day.
The outlook seems dim for OPEC members and Russia to coordinate on a production cut that will have a meaningful impact in reducing global oil supplies. Iraq’s oil minister Jabar al-Luaibi stated Sunday that it should be exempt from any proposed deal based on the country’s need to drive oil revenues in order to continue its ongoing war against Islamic State. Libya, Nigeria and Iran had already been exempted from participating in the proposed 700,000 barrel per day cut.
Iraq has also maintained that its production numbers differ from data estimated by OPEC. The country’s oil ministry reported that 4.77 million barrels per day were produced in September versus the cartel’s numbers of 4.2 million barrels per day. The discrepancy had earlier been a sticking point to proceeding in further negotiations to join any coordinated production freeze or cut.
Now, it appears that Iraq with its all-out rejection to join a deal has spurred other smaller producers to be less cooperative. Although cartel members such as Indonesia and Venezuela either do not have the capacity or are constrained to move the dial in terms of affecting global oil supply, their apparent reluctance to join a coordinated effort will only complicate any efforts to foster a unified OPEC response to lower oil prices.
Russia and Saudi Arabia, holders of the most spare capacity, also do not appear driven to curtail production. Russia is producing at post-Soviet records, and is looking less enthusiastic in engaging in any types of measures to freeze or cut production with OPEC. With a significant fall in the ruble, which has reduced lifting costs, and a tax structure in Russia that incentivizes companies to increase investments in the upstream sector in a low oil price environment, it would seem that the country’s production growth will continue unabated.
If Saudi Arabia were to make a real cut to its production – not just calling a seasonal production decline a move to reduce output – it would effectively be ceding market share to Iraq, and possibly other OPEC members. It was reported in September, Iraq’s exports to China eclipsed those from Saudi Arabia. Despite any rhetoric to the contrary, the battle for market share among OPEC members versus other large producers will continue – up to and after the Nov. 30 official OPEC meeting – leaving oil prices trading in a narrow band, absent of any upside catalysts around demand.
Delia Morris has worked in the international upstream oil & gas industry for over 12 years, and is currently Director, Global Energy Sector at Stratfor, a geopolitical intelligence firm that provides strategic analysis and forecasting services. Please contact Delia at email@example.com
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