Oil mar­kets re­main bear­ish

NBK ECO­NOMIC RE­PORT

Kuwait Times - - BUSINESS -

It was not meant to hap­pen this way. An­other month, an­other de­cline in oil prices. This time, in Brent’s case, the drop was to its low­est level in ten months when it fell to $44.8 per bar­rel (bbl) on 21 June. Since OPEC/non-OPEC rolled over their pro­duc­tion cut agree­ment for an ad­di­tional 9 months on 25 May, oil prices have fallen by 7 per­cent. Crude oil bench­marks, Brent and West Texas In­ter­me­di­ate (WTI), closed June at $47.9/bbl and $46.0/bbl, re­spec­tively, a de­cline of 15 per­cent in 2017 on av­er­age. In­deed, Brent’s per­for­mance in the first half of this year was its worst since 1998.

While a late, 8-con­sec­u­tive day gain at the end of June and in early July-the long­est run of gains in seven years-helped spare some of Brent’s blushes, there is lit­tle es­cap­ing the fact that oil bulls have largely de­serted the scene and that the mar­kets have fallen into a state of de­spon­dency. And the chief cul­prit is US light tight oil (shale), whose vol­umes are help­ing to both off­set some of the sup­plies taken off the mar­ket by OPEC/non-OPEC this year and slow the draw­down of crude stocks from stor­age tanks.

Weekly met­rics on these two dy­nam­ics are, along with counts of US oil rigs, the most closely watched data by the mar­kets. And they have not made pleas­ant read­ing for OPEC in 2017. US crude pro­duc­tion is up 5.5 per­cent to 9.25 mb/d as of 23 June -an ad­di­tional 480,000 bar­rels per day (b/d) of crude to partly off­set the 1.8 mb/d of sup­plies that OPEC/non-OPEC have with­drawn from the oil mar­kets since Jan­uary. US shale’s resur­gence is even more re­mark­able since bot­tom­ing out at 8.43 mb/d ex­actly a year ago: an im­pres­sive 822,000 b/d, which is a year-onyear (y/y) rise of al­most 10 per­cent.

The closely-watched oil mar­ket re­port by the In­ter­na­tional En­ergy Agency (IEA) is also un­likely to pro­vide much com­fort. In its most re­cent edi­tion, the IEA con­firmed what many an­a­lysts and mar­ket traders had long sus­pected, which is that OECD com­mer­cial crude and pe­tro­leum prod­uct stocks in­creased rather than de­creased in the first quar­ter of this year. Four months into the OPEC/non-OPEC agree­ment and to­tal OECD stocks had re­versed course and gained 60 mil­lion bar­rels to reach 3.044 bil­lion bar­rels by April. OPEC’s tar­get of bring­ing global crude and pe­tro­leum stocks back to the 5-year av­er­age level of around 2.75 bil­lion bar­rels ap­pears to be even far­ther away, pos­si­bly into 2018 at the cur­rent rate.

More­over, OPEC’s own pro­duc­tion is head­ing in the wrong di­rec­tion, away from its ag­gre­gate pro­duc­tion tar­get of 31.75 mb/d. Ac­cord­ing to OPEC sec­ondary source data, the group’s to­tal out­put climbed back over the 32 mb/d level in May to 32.14 mb/d, thanks to out­put gains in Nige­ria and Libya. These two OPEC mem­bers are not sub­ject to out­put re­stric­tions un­der the terms of the Novem­ber agree­ment. But com­pli­ance lev­els among quota mem­bers also de­te­ri­o­rated slightly in May, to 105 per­cent from 107 per­cent in April, as a re­sult of out­put in­creases in Iraq, Iran and Al­ge­ria. Lit­tle won­der that oil mar­kets are de­spon­dent. Calls for OPEC to con­sider deeper cuts, in or­der to ac­cel­er­ate the stock draw­down, are grow­ing louder. In view of the fact that pre­vi­ous in­stances of OPEC mar­ket in­ter­ven­tion, most no­tably in late 2008, have tended to in­volve sev­eral pro­duc­tion cuts, rather than one, it is not en­tirely wish­ful think­ing on the part of the oil bulls. Stock draws to ac­cel­er­ate in 2H17 but 2018 is look­ing more likely for OPEC’s much-cov­eted ‘bal­ance’ Nev­er­the­less, there may be a glim­mer of light at the end of the tun­nel. US crude and pe­tro­leum prod­uct stock­piles are slowly draw­ing down as the peak sum­mer de­mand gets into full swing. And there is cer­tainly scope for more size­able in­ven­tory de­clines be­fore the au­tumn re­fin­ery main­te­nance pe­riod. Ac­cord­ing to the IEA, de­mand growth is ex­pected to firm up to an av­er­age of 1.5 mb/d in 2H17 com­pared to 1.1 mb/d in 1H17.

With de­mand out­strip­ping sup­ply since the be­gin­ning of 2Q17, the de­mand/sup­ply bal­ance or stock change has swung into neg­a­tive ter­ri­tory. Bar­ring de­mand growth mod­er­at­ing and/or sup­ply growth ac­cel­er­at­ing dur­ing the re­main­der of the year, the muchtouted stock draw should in­deed fi­nally take place. Based on our own es­ti­mates, for the end of 4Q17, a cu­mu­la­tive stock draw of around 240 mil­lion bar­rels could be on the cards. This would bring OECD stocks back down to 2.8 bil­lion bar­rels, not far off OPEC’s 5-year av­er­age tar­get of 2.75 bil­lion bar­rels. 2018 thus looms large as the makeor-break year.

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