Oil Falls on Supply Worries
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Markets continue to be encouraged by positive data showing high compliance levels for the 1.8 million barrel per day coordinated cut agreed among the Organization of the Petroleum Exporting Countries (OPEC) and eleven large non-OPEC producers.
As such, the market did not fully consume some bearish data points revealed in the Energy Information Agency’s (EIA) Weekly Petroleum Status Report, released Wednesday morning. Following the data release, oil prices traded up and down in a tight band – reflecting the support of the OPEC cuts, but the downward pressure indicated by a rising U.S. oil rig count and a rebound in U.S. oil production growth.
The front-month WTI contract settled down .3 percent Wednesday on the NYMEX at $53.83 per barrel, while the Brent front-month contract fell .3 percent on the ICE to $56.36 per barrel.
For the week ending Feb. 24, the EIA reported that U.S. oil stocks rose by 1.5 million barrels to 520.2 million barrels, which represents an all-time high. Analysts had been anticipating a larger increase to inventories, of about 2.5 million barrels – mostly due to an expected uptick in crude imports. Weekly imports rose by 303,000 barrels per day to 7.589 million barrels per day, but are below the four-week average level of 8.185 million barrels per day.
Gasoline inventories fell by .5 million barrels, versus expectations for a fall of 1.6 million barrels. Gasoline demand over the last four weeks has been down 6.2 percent versus the same period last year, according to EIA data.
Distillate (including diesel and heating oil) fell by .9 million barrels, which was in line with expectations. Crude, gasoline and distillate stock levels are all above the upper limit of the average range for this time of year.
U.S. crude production continues to grow, and was at 9.032 million barrels per day for the week ending Feb. 24, according to the EIA. Since the Nov.30 announcement for a coordinated cut among OPEC and non-OPEC producers, oil prices have risen by about 20 percent and have stabilized in a trading band of $51 per barrel to about $56 per barrel.
Many U.S. tight oil producers claim to have reached – via operational efficiencies – average WTI breakevens of between $35 per barrel to $40 per barrel. Undoubtedly, this has led to an increase in drilling activity and production.
Whether U.S. production will displace the supply taken off the market as a result of the coordinated cut remains to be seen, and only time will tell. The high level of average OPEC adherence to the cuts – approximately 90 percent for the months of January and February – have stabilized the market. Another output cut may be necessary to keep markets optimistic, however, as potential demand catalysts are few and far between.
But rallying OPEC producers behind a second cut may be harder to realize. Although price stability has been beneficial in many ways to OPEC producers, it may not prove as efficacious as the strategy to secure and expand individual country market share. Iraq and the UAE have both lagged behind other OPEC members in their average compliance levels in the cut. The Iraqi government has been severely strained as it ramps up its fight against Islamic State. On Wednesday, Iraqi security forces reportedly retook a key bridge in Mosul, marking another advance in a months-long battle to retake the city from the Islamic State.
Sources indicate that Russia has struggled to hold up its part of the bargain – the country apparently pared back production by about 124,000 barrels per day in February, versus a commitment to cut 300,000 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 email@example.com
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