This opinion piece presents the opinions of the author.
After Tuesday’s settlement, the American Petroleum Institute (API) released an exceedingly bearish report that showed that for the week ending Feb. 10, U.S. crude inventories rose by almost 10 million barrels, versus analyst expectations of an increase of about 3 million barrels.
As a result, oil prices trended down in pre-market trading early Wednesday. Prices fell further when the Energy Information Agency (EIA) released its Weekly Petroleum Status Report, which showed similarly large builds to inventories with a record increase to crude stocks.
The front-month WTI contract settled down .2 percent Wednesday on the NYMEX at $53.11 per barrel, while the Brent front-month contract fell .4 percent on the ICE to $55.75 per barrel.
For the week ending, Feb. 10, the EIA reported that oil stocks rose by 9.5 million barrels to 518.1 million barrels – marking a new record. Gasoline inventories rose by 2.8 million barrels, versus expectations for a fall of .5 million barrels. Distillate (including diesel and heating oil) fell by .7 million barrels, versus expectations for a drop of 1.3 million barrels. Crude, gasoline and distillate stock levels are all above the upper limit of the average range for this time of year.
Though the EIA report was by and large negative, the much higher than expected level of oil inventories was the main driver to send prices downward. Winter brings the refinery turnaround season and lower gas demand, in general. Consequently, gasoline inventories – and to a certain extent crude inventories – typically rise, as capacity is taken offline. The weekly U.S. refinery utilization rate fell 2.3 percent to 85.4 percent. U.S. oil production stayed relatively flat week over week at 8.977 million barrels per day.
After gaining almost 20 percent since the Nov. 30, 2016 agreement, oil prices have been range-bound over the last few weeks, around $51 per barrel to $56 per barrel. The market has also built the largest net long position in over 10 years. With no real demand catalysts on the horizon, and record levels of crude held in storage globally, only a supply shock of some sort has the potential to move the market.
The effects of the agreed output cut between the Organization of the Petroleum Exporting Countries (OPEC) and other large producers are already baked into prices. The market sees the threat of rising U.S. tight oil production and brimming storage levels as the biggest downside risks to oil prices.
Although OPEC adherence to the cuts has been high and has comforted markets somewhat, questions remain around how those cuts are materializing. Saudi Arabia was slated to pullback 486,000 barrels per day of production, but has stated it has actually cut 800,000 barrels per day. Part of this is to compensate for Algeria and Iraq, which have not fully complied with their own quotas. Also, it should be noted that Saudi Arabia typically throttles production during the winter months so true cuts could be much less.
The coordinated cut between OPEC and non-OPEC producers aims to remove 1.8 million barrels per day off global markets during a 6-month period, which began Jan. 1. The non-OPEC portion of the output cut, equal to .6 million barrels per day is led by Russia, which had committed to reducing production by about 300,000 barrels per day. Complications abound, however, around accurately monitoring Russia’s compliance levels – in January the country claimed to have cut production by 100,000 barrels per day.
Another moving part is rising geopolitical tension facing Russia, and also Iran – an OPEC member that was allowed to grow production within certain limits during the coordinated cut period. With the combined effects of prices stabilizing above $50 per barrel and the posed downside risk of U.S. oil flooding the markets on the horizon, it could be inferred that each nation will take advantage of this window of time to grab market share and thereby have less inclination to abide by the proposed caps on their respective production levels.
Delia Morris has worked in the international upstream oil & gas industry for over 13 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 firstname.lastname@example.org
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