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After losing over 5 percent in the last week, oil prices regained some lost ground after the Energy Information Agency (EIA) reported an unexpected decrease to U.S. crude inventories. Wednesday morning the EIA released its Weekly Petroleum Status report, which showed a surprise drop in oil stocks of .2 million barrels, versus analyst estimates for a build of over 3 million barrels. Oil prices gained more than 1 percent off the initial newsflow.
Last week, a massive sell-off ensued after the EIA reported a large increase to crude inventories. This brought about more bearish sentiment and less credence in the idea that markets would level out by the end of 2017. A huge increase to U.S. and other OECD crude inventories led to the U.S. benchmark slipping under the critical $50 threshold, and Brent falling 8 percent for the week ending March 10. Large speculative long positions in the market made it more vulnerable to a snowballing selloff.
The front-month WTI contract settled up 2.4 percent Wednesday on the NYMEX at $48.86 per barrel, while the Brent front-month contract rose 1.8 percent on the ICE to $51.81 per barrel.
The EIA report showed some other positive data points that buoyed markets. For the week ending March 10, U.S. gasoline inventories fell by 3.1 million barrels, versus expectations for a smaller drop of 2 million barrels. Distillate stocks (including diesel and heating oil) fell 4.2 million barrels, versus expectations for a decrease of about 1.5 million barrels. Weekly imports of crude fell by 745,000 barrels per day, which corrected for the large uptick seen during the previous week, this had accounted for a large portion of the rise in crude inventories for the week ending March 3.
For most of this week, markets were largely in a standstill – anticipating a Wednesday afternoon announcement from the Federal Reserve about a possible rate increase. The Federal Reserve announced a rise in the federal-funds rate of .25 percent – to between .75 percent and 1 percent. The U.S. dollar actually fell on the news, indicating that the move had been largely priced in, which helped sustain the day’s rally in crude.
The latest worry to grip oil markets has been the relative efficacy of the agreed OPEC and non-OPEC output cuts. Until last week’s fall, oil prices had risen by more than 20 percent since the agreement announced Nov. 30 to cut up to 1.8 million barrels per day, or about 2 percent of global production. While compliance levels have been historically high for OPEC – estimated to be around 90 percent – doubts have surfaced around whether the cuts will go far enough.
There is uncertainty around OPEC’s appetite to extend cuts past the 6-month period, which ends in June. Many view an extension to the cuts as a compelling countermeasure to a resurgence in U.S. shale production, which the EIA estimates will reach 9.7 million barrels per day in 2018. For the week ending March 10, U.S. oil production grew slightly, by 21,000 barrels per day to 9.109 million barrels per day, according to the EIA.
On Tuesday, markets turned skittish when it was revealed that Saudi Arabia, which has had the largest influence in the cuts, had actually boosted production in February (versus January levels), according to its own country sources. Saudi Arabia claimed its February output was at 10.01 million barrels per day while OPEC reported 9.8 million barrels per day. To many in the market, the higher production rates claimed portend a return to the battle for market share among OPEC members, which had kept prices low for over two years – before the Nov. 30 agreement.
According to a report issued by OPEC (compiled from secondary sources), the cartel's February production stood at 31.96 million barrels per day, which falls below the allotted 32.68 million barrels per day agreed in Nov. 2016. However, what's interesting – and potentially problematic – is that individual country sources, for seemingly political reasons, i.e., to demonstrate national autonomy, are claiming higher output figures than the reported OPEC numbers. For example, Iraq was allotted 4.35 million barrels per day as per the agreement, but said it produced 4.57 million barrels per day (versus OPEC’s report that it was at 4.41 million barrels per day). Venezuela similarly has claimed a rate of about 2.25 million barrels per day for February, which is higher than what OPEC cited for the cash-strapped country, at 2 million barrels per day.
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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