Commodity Weekly: OPEC Rhetoric Fails to Rouse the Bulls

Commodity Weekly: OPEC Rhetoric Fails to Rouse the Bulls
Oil market faces further downside risk if OPEC does not extend output cuts. Cartel rhetoric staves off lower prices in the meantime.

This opinion piece presents the opinions of the author.
It does not necessarily reflect the views of Rigzone.

With the U.S. benchmark almost slipping below the $50 per barrel threshold Wednesday, Saudi Energy Minister Khalid al-Falih’s comments helped soothe market anxiety somewhat around the direction of the price of oil.

Words from Saudi Arabia – the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC) – provided some assurance to the market that the cartel was leaning toward an extension of the 6-month output cut of 1.2 million barrels per day, which is set to expire at the end of June.

 
Delia Morris
Delia Morris

OPEC is scheduled to meet May 25 and will announce at that time whether a production pullback will continue for either a 3-month or 6-month period.

Market sentiment has become more bearish with abundant signs emerging that U.S. shale oil production is making a comeback into an already oversupplied market. The Energy Information Agency (EIA) reported that for the week ending April 14, U.S. crude production rose to 9.25 million barrels per day – marking the highest level since August 2015.

News of a surprise build to gasoline inventories led to oil prices tumbling almost 4 percent Wednesday – hitting a two-week low. The overwhelming sense of unease around the trajectory of the market has rendered it susceptible to headline risk.

This phenomenon played out with the gasoline inventory numbers. Traders focused on the seemingly negative news, and eschewed a positive data point that oil inventories at Cushing, OK (the delivery point for the WTI contract) had actually fallen by .8 million barrels.

For the week ending April 14, gasoline inventories showed an unexpected rise of 1.5 million barrels, according to the EIA. Although the increase occurred during a time when stocks typically fall due to increased demand, it is important to note that U.S. gasoline imports were unusually high – at 843,000 barrels per day (and, perhaps, a one-off). The 2017 average has been approximately 300,000 barrels per day less than this figure. Demand for total motor gasoline slipped week over week by only 52,000 barrels per day.

Doubts also remain around the true efficacy of the joint OPEC/non-OPEC cuts, which totaled 1.8 million barrels per day. Despite record OPEC adherence levels to the coordinated cut, there is skepticism that the cuts are attacking the real source of deflated oil prices – the glut of crude held in storage. According to an April 13 report from the International Energy Agency (IEA), oil stocks held in storage in the Organization for Economic Cooperation and Development countries are falling, but remain almost 300 million barrels above the 5-year average.

Moreover, there is evidence that the drawdown in global crude stocks began in earnest in the summer of 2016. This factor raises questions around whether the coordinated cuts are making a fundamental difference. After all, the biggest gains in the oil price occurred after the announcement of the OPEC/non-OPEC cuts, but before actual implementation.

With many believing that the prospect of an extended OPEC output cut is already priced in, downside risk will only grow if it appears that the cartel is not on the path to maintain the production pullback.

Delia Morris has worked in the international upstream oil & gas industry for over 13 years. Email Delia at delia.morris@gmail.com

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