Chronic over­sup­ply as Libya out­put reaches 4-year high


Kuwait Times - - BUSINESS - KUWAIT: Oil Prices

Crude prices reached the low­est in 7-months dur­ing the last week of June-17 on per­sis­tent over­sup­ply con­cerns and a bulging in­ven­tory. Data on ris­ing oil out­put from Libya and Nige­ria showed the oil glut wors­en­ing as the OPEC mem­bers ex­panded out­put post com­ing out of dis­rup­tions that curbed out­put over­the past sev­eral years. Libya re­port­edly raised its oil out­put to a 4-year high level of 1.005 mb/d af­ter the coun­try’s largest oil field re­sumed pro­duc­tion. Mean­while, al­though Nige­ria has ramped up out­put re­cently on its way to 2 mb/d mark, the shut­down of a prom­i­nent pipe­line has af­fected the ship­ment of Bonny light crude since Thurs­day by al­most 160 tb/d, dis­rupt­ing out­put re­cov­ery in the coun­try.

Nev­er­the­less, there were also bullish fac­tors in the mar­ket re­cently. Kuwait’s OPEC Gover­nor has said that oil in­ven­to­ries are seen fall­ing at a faster pace dur­ing 2H-17 as de­mand in­creases and OPEC mem­bers in­crease their com­pli­ance to pro­duc­tion cuts. More­over, a re­cent re­port showed that ini­tial signs of oil mar­ket re­bal­anc­ing has been spot­ted in the US where MidAt­lantic gaso­line sup­plies are now more than 5 mil­lion bar­rel less than a year ago, re­port­edly due to lower vol­umes from Europe that are now be­ing used to meet do­mes­tic de­mand in­stead of ex­ports.

Also, in its Short Term En­ergy Out­look, the US EIA re­ported that low oil prices have af­fected pro­duc­tion in the US as against pre­vi­ous ex­pec­ta­tions that the US can man­age to pump greater quan­ti­ties of oil at the cur­rent level of prices. In ad­di­tion, the IEA in its monthly re­port said that al­though sup­ply was ris­ing, de­mand is climb­ing faster than ini­tially es­ti­mated.

In its first out­look for 2018, OPEC has hinted at a slower than ex­pected ramp-up in oil de­mand and growth is es­ti­mated to be slightly less than 2017 but in line with the five-year av­er­age growth. On the sup­ply side, OPEC ex­pects 2018 sup­ply to grow by 1.14 mb/d, a 43% in­crease as com­pared to the growth in 2017, with US be­ing the pri­mary fac­tor for this in­crease, al­though its out­put is ex­pected to be marginally af­fected by cost in­fla­tion and a de­cline in well pro­duc­tiv­ity. The net ef­fect is ex­pected to re­sult in a de­layed re­bal­anc­ing in the oil mar­ket.

Av­er­age oil prices de­clined for the sec­ond con­sec­u­tive month wit­ness­ing the big­gest de­cline in seven months. OPEC crude dropped 8.1%, while Brent and Kuwait crude de­clined by 8.0% and 8.8%, re­spec­tively. In terms of monthly av­er­age oil pro­duc­tion, Bloomberg data as well as OPEC sec­ondary sources point to higher OPEC out­put in June-17 pri­mar­ily on the back of higher out­put in Saudi Ara­bia and Libya.

The month also saw Equa­to­rial Guinea be­ing added as the 14th mem­ber of the OPEC with a pro­duc­tion rate of 150 tb/d in June-15. As ex­pected in our May-17 monthly re­port, there are grow­ing in­di­ca­tions that Libya and Nige­ria would be asked to cap their pro­duc­tions in the next OPEC meet­ing in or­der to re­strict the group’s to­tal out­put. KAMCO Re­search es­ti­mates out­put cuts of close to 2 mb/d by year end by OPEC + non-OPEC, in­clud­ing ex­pected cuts im­posed on ex­empted mem­bers in OPEC.

Oil traded mostly be­low USD 45/b dur­ing June-17 only to trend up from the last week of the month on the back of re­ports of in­ven­tory draw­downs in the US. Crude prices reached the low­est level since Novem­ber-16 af­ter re­ports of oil glut wors­en­ing on the back of higher out­put from Libya and Nige­ria. Av­er­age OPEC crude prices also dropped for the sec­ond con­sec­u­tive month to reach USD 45.2/b de­clin­ing by 8.1% to reach the low­est in seven months.

The rally in oil prices seen dur­ing the last week of June-17 was on the back of higher-than-ex­pected draw­down of re­fined prod­ucts in the US and lower-than-ex­pected in­crease in crude in­ven­to­ries. Data for the first week of July-17 also pointed to sim­i­lar draw­downs. Ac­cord­ing to the weekly in­ven­tory data from EIA, US crude in­ven­to­ries dropped the most in 10 months by 7.6 mil­lion bar­rels last week as against much lower ex­pec­ta­tions. API pointed to a sim­i­lar de­cline of 8.1 mil­lion bar­rel. Nev­er­the­less, lack­lus­ter growth in de­mand for US gaso­line dented the im­pact of lower in­ven­to­ries. That said, the ex­pected pick up in the price elas­tic gaso­line de­mand in the up­com­ing sum­mer driv­ing sea­son are ex­pected to sup­port prices gaso­line and crude. Fur­ther­more, the lat­est rig count data from Baker Hughes showed an in­crease of seven oil rigs dur­ing the last week of June-17 to reach 763 ac­tive rigs af­ter drop­ping for the first time in al­most six months in the week be­fore.

Mean­while, IEA up­graded its oil de­mand growth fore­cast for 2017 by 0.1 mb/d which is now ex­pected to reach 98 mb/d fol­lowed by an in­crease of 1.4 mb/d in 2018 to reach 99.4 mb/d. OECD stocks con­tin­ued to de­cline with the gap from five-year av­er­age de­clin­ing to 266 mil­lion bar­rel as com­pared to 300 mil­lion bar­rel a month be­fore. The re­port also said that quar­terly global de­mand growth for oil strength­ened dur­ing Q2-17 emerg­ing from a weak Q1-17 to reach 1.5 mb/d on the back of stronger yearon-year growth in the OECD coun­tries and in de­vel­op­ing coun­tries.

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