Oil prices firm on eas­ing con­cerns over glut

KAMCO Oil Mar­ket Monthly Re­port

Kuwait Times - - BUSINESS -

After de­clin­ing to the low­est in seven months dur­ing June-17, oil prices in early Au­gust-17 rose to the highest level since the last week of May-17 on de­clin­ing crude in­ven­to­ries in the US that sup­ported a march to­wards re­bal­anc­ing of the oil mar­ket. A num­ber of pos­i­tive de­vel­op­ments and data points sup­ported oil prices dur­ing the last few weeks, in­clud­ing a pledge to curb OPEC oil ex­ports, a softer US dol­lar that reached multi-month lows as well as im­prov­ing fun­da­men­tals in the US that sup­port higher oil de­mand. Brent spot prices topped $53/b dur­ing the first week of Au­gust-17 while OPEC crude prices re­claimed $50/b after al­most three months of sub­dued per­for­mance.

In a meet­ing held in St Peters­burg in late July17 be­tween OPEC and non-OPEC mem­bers to dis­cuss pro­duc­tion cuts, the dis­cus­sion fo­cused on oil ex­ports in ad­di­tion to com­pli­ance to pro­duc­tion cuts. In the meet­ing, Saudi Ara­bia pledged to curb its oil ex­ports to 6.6 mb/d starting from Au­gust-17 , a re­duc­tion of al­most 0.3 mb/d ac­cord­ing to the lat­est fig­ures avail­able from JODI for May-17 and 0.7 mb/d less than ex­ports in Au­gust-16. The meet­ing also saw Nige­ria vol­un­tar­ily agree­ing to limit its oil pro­duc­tion at 1.8 mb/d while there was a con­sen­sus on press­ing for higher com­pli­ance by other mem­bers. Rus­sia’s en­ergy min­is­ter said that pro­duc­tion can be fur­ther curbed by al­most 0.2 mb/d if com­pli­ance was 100 per­cent.

OPEC and non-OPEC pro­duc­ers also dis­cussed ex­tend­ing the pro­duc­tion cut agree­ment be­yond March-18 if it is nec­es­sary to re­bal­ance the oil mar­ket.

In a fol­low-up meet­ing in Abu Dhabi in Au­gust-17 to specif­i­cally dis­cuss com­pli­ance to pro­duc­tion cuts, Iraq, UAE and Kaza­khstan, in ad­di­tion to Malaysia, re­it­er­ated their com­mit­ment to the deal. Nev­er­the­less, dif­fer­ence over es­ti­mates of pro­duc­tion by UAE and Iraq con­tin­ues that was re­flected in the com­pli­ance lev­els since the start of the deal. It was re­ported that, the up­com­ing tech­ni­cal com­mit­tee’s meet­ing on 21-Au­gust-17 would see fi­nal de­ci­sion on the fu­ture course of com­pli­ance.

Mean­while, the lat­est in­ven­tory data re­leased by the EIA showed record US re­fin­ery uti­liza­tion dur­ing the last week that re­sulted in a de­cline in crude in­ven­tory in the US. To­tal in­ven­to­ries de­clined by 6.45 mil­lion bar­rels, also due to a drop in US oil im­ports. EIA data also showed that US oil pro­duc­tion de­clined for the se­cond time in three weeks, repli­cat­ing the trend seen in US rig count, ac­cord­ing to Baker Hughes. In ad­di­tion, a num­ber of oil pro­duc­ers in the US have an­nounced plans to curb fu­ture spend­ing that could af­fect out­put from the US.

In terms of oil pro­duc­tion, OPEC out­put con­tin­ued to in­crease for the third con­sec­u­tive month dur­ing July-17 to reach 32.9 mb/d. Ac­cord­ing to Bloomberg data, oil pro­duc­tion by the group has in­creased by al­most 1 mb/d over the past three months, which we be­lieve is ba­si­cally tar­geted to meet the sea­sonal sum­mer de­mand.

Oil prices

Oil price trend dur­ing July-17 was mostly pos­i­tive con­tin­u­ing from the last week of June17 led by ex­pec­ta­tions of a pos­i­tive out­come from the OPEC meet­ings. This trend con­tin­ued in Au­gust-17 with Brent reach­ing the highest level in ten weeks to $52.88/b. OPEC crude also surged and re­gained the crit­i­cal $50/b level to reach $50.5/b in Au­gust-17. Av­er­age monthly oil prices also surged after two con­sec­u­tive months of de­cline. Av­er­age OPEC crude prices reached $46.93/b after in­creas­ing by 3.8 per­cent over the pre­vi­ous month, while Brent and Kuwait crude in­creased by a slightly higher 4.1 per­cent and 4.5 per­cent, re­spec­tively.

The de­clin­ing oil stocks in the US was one of the key fac­tors for the surge in oil prices over the past few weeks. Ac­cord­ing to the EIA, in­ven­to­ries dropped by 6.45 mil­lion bar­rels dur­ing the last week, which is more than three times the ex­pec­ta­tions from an­a­lysts, show­ing tight­en­ing of the oil mar­ket. Nev­er­the­less, the cur­rent in­ven­tory level con­tin­ues to ex­ceed 5-year av­er­age by al­most 250 mil­lion bar­rels.

On the other hand, US rig count de­clined for the se­cond con­sec­u­tive week to reach 765 oil rigs and has re­mained al­most flat over the past four weeks. In an an­other in­di­ca­tion of slow­ing crude pro­duc­tion in the US, the EIA said that US shale pro­duc­ers are drilling mul­ti­ple wells too close to each other, thereby af­fect­ing the av­er­age pro­duc­tiv­ity of the oil well. Ac­cord­ing to the agency, the out­put from oil wells are fall­ing by 0.35 mb per month which is the fastest de­cline since 2012. Oil in­vest­ment also seems to be de­clin­ing as in­di­cated by sev­eral oil drillers. Pro­duc­ers like Cono­coPhillips, Hess, Anadarko and Whit­ing have in the re­cent weeks guided for a de­cline in cap­i­tal ex­pen­di­ture in 2017, while Con­ti­nen­tal Re­sources has an­nounced, as part of its strate­gic plan, that it would not raise any new debt and would fund fu­ture wells from in­ter­nally gen­er­ated cash flow. Given the sit­u­a­tion, we be­lieve that the US gov­ern­ment’s en­ergy in­vest­ment plans could be the key fac­tor in de­ter­min­ing the fu­ture out­put from the re­gion.

World oil de­mand

World oil de­mand growth pro­jec­tions for 2017 was up­graded by 0.1 mb/d in the lat­est OPEC monthly re­port and de­mand is now ex­pected to reach 96.49 mb/d. The in­crease pri­mar­ily re­flected bet­ter-than-ex­pected de­mand data in all the OECD coun­tries for Q2-17. OECD America recorded the big­gest de­mand in­crease in two years at more than 0.8 mb/d year-onyear in May-17 that re­sulted in an up­ward re­vi­sion of 0.2 mb/d for Q2-17. This in­crease was pri­mar­ily due to bet­ter de­mand for trans­porta­tion fu­els as both gaso­line and jet fuel saw con­sid­er­able in­crease in re­quire­ments cou­pled with gains in oil us­age in the in­dus­trial sec­tor. More­over, this de­mand growth mo­men­tum is ex­pected to con­tinue in Q3-17 (re­vised up­ward by 50 tb/d) as the sum­mer season is ex­pected to drive fur­ther in­crease in trans­porta­tion fu­els. Ac­cord­ing to the lat­est avail­able data, US oil de­mand grew by 0.5 mb/d dur­ing the first seven months of the year and the ex­pec­ta­tions for the re­main­der of the year and for 2018 is also pos­i­tive driven by faster eco­nomic growth cou­pled with higher oil us­age in the trans­porta­tion and in­dus­trial sec­tors. Else­where in the OECD, de­mand in Europe was also re­vised up­wards by 40 tb/d for Q2-17 led by im­prov­ing eco­nomic con­di­tions and in­creas­ing ve­hi­cle sales that has gone up by around 5 per­cent in the re­gion dur­ing 1H-17 lead­ing to higher oil de­mand. How­ever, for the re­main­der of the year and for 2018, de­mand growth ex­pec­ta­tions are rel­a­tively con­ser­va­tive due to the high base­line ef­fect, fuel tax­a­tion and sub­sti­tu­tion ef­fect. De­mand fig­ures for OECD Asia Pa­cific was also re­vised up­wards by 20 tb/d for Q2-17 mainly due to higher de­mand in South Korea. The over­all im­pact of the afore­men­tioned re­vi­sions was an in­crease in de­mand for the over­all OECD re­gion for 2017 by 77 tb/d.

Global oil de­mand growth ex­pec­ta­tions for 2018 was also marginally up­graded to 1.28 mb/d to reach 97.77 mb/d. Higher de­mand in 2018 is ex­pected to be driven by non-OECD de­mand growth at 1.07 mb/d, while OECD coun­tries are ex­pected to add ap­prox­i­mately 0.21 mb/d as growth in OECD US and Europe is ex­pected to be partly off­set by a con­trac­tion of de­mand in OECD Asia Pa­cific. In the nonOECD camp, the big­gest de­mand growth is ex­pected in China (+0.32 mb/d) fol­lowed by In­dia at (0.16 mb/d). World oil sup­ply

Global oil sup­ply dur­ing July-17 wit­nessed a month-on-month in­crease of 0.17 mb/d and av­er­aged at 97.3 mb/d, ac­cord­ing to pre­lim­i­nary data, with non-OPEC sup­ply in­creas­ing by 0.52 mb/d to av­er­age at 64.49 mb/d dur­ing the month. For the full year 2017, non-OPEC oil sup­ply growth ex­pec­ta­tion was re­vised down by 28 tb/d and is now ex­pected to grow by 0.78 mb/d to av­er­age at 57.77 mb/d. The down­ward re­vi­sion mainly re­flects a de­cline in oil sup­ply from the US, par­tic­u­larly in Q2-17 that was par­tially off­set by up­ward re­vi­sion in sup­ply from Rus­sia (+38 tb/d) and China (+31 tb/d) dur­ing the said quar­ter. For the over­all OECD re­gion, sup­ply ex­pec­ta­tions were low­ered by 0.09 mb/d that re­flected changes solely in OECD Amer­i­cas. Within this re­gion, the US recorded the bulk of the down­grades dur­ing Q2-17 to Q4-17. OECD Europe pro­jec­tions were un­changed in the lat­est OPEC re­port, with ex­pec­ta­tions of higher pro­duc­tion in Nor­way (+0.02 mb/d to av­er­age at 2.01 mb/d in 2017) and other Euro­pean pro­duc­ers par­tially off­set by an ex­pected de­cline of 30 tb/d in the UK to av­er­age at 0.99 mb/d.

Non-OPEC sup­ply growth pro­jec­tions for 2018 was also low­ered by 42 tb/d to 1.10 mb/d and is ex­pected to av­er­age at 58.87 mb/d. The down­grade pri­mar­ily re­flected down­ward re­vi­sion in sup­ply ex­pec­ta­tions for US and Canada (new oil sand projects). Nev­er­the­less, key driv­ers for the higher sup­ply in 2018 are US, Brazil, Canada, Rus­sia, Kaza­khstan, Congo and the UK partly off­set by de­clines in Mex­ico, China, Columbia and Azer­bai­jan.

OPEC oil pro­duc­tion & spare ca­pac­ity

OPEC oil pro­duc­tion con­tin­ued to rise for the third con­sec­u­tive month in July-17 reach­ing 32.9 mb/d, ac­cord­ing to Bloomberg data and OPEC sec­ondary sources. This was the highest monthly pro­duc­tion rate dur­ing this year led pri­mar­ily by in­crease in pro­duc­tion in Libya dur­ing July-17. Nev­er­the­less, the yearon-year de­cline in OPEC pro­duc­tion con­tin­ues to be in line with pre­vi­ous months at around 2 per­cent for July-17. Ac­cord­ing to Bloomberg data, oil pro­duc­tion by OPEC has in­creased by al­most 1 mb/d over the past three months, which we be­lieve is ba­si­cally tar­geted to meet the sea­sonal sum­mer de­mand. Dur­ing July-17, Saudi Ara­bia and UAE also in­creased pro­duc­tion marginally by 30 tb/d each, while Gabon added 20 tb/d dur­ing the month. These hikes dur­ing the month were par­tially off­set by smaller re­duc­tion in pro­duc­tion in An­gola (-30 tb/d) and Iran, Kuwait and Qatar, each de­clin­ing by 10 tb/d.

Saudi Ara­bia, in its ef­forts to cap ex­ports to 6.6 mb/d as pledged in the lat­est meet­ing, is ex­pected to lower al­lo­ca­tions to its cus­tomers glob­ally by at least 0.52 mb/d, ac­cord­ing to a re­port from Reuters. Al­lo­ca­tions to Asia is ex­pected to be low­ered by 10 per­cent while to Europe it would be low­ered by 0.22 mb/d. Nev­er­the­less, along with re­duc­ing ex­ports, the King­dom con­tin­ues to curb its pro­duc­tion in line with the deal.

Pro­duc­tion in Libya in­creased by 180 tb/d dur­ing July-17, one of the big­gest monthly in­crease, and sur­passed the 1 mb/d mark to achieve a pro­duc­tion rate of 1.02 mb/d. Pro­duc­tion is ex­pected to in­crease fur­ther as the coun­try tar­gets a pro­duc­tion rate of 1.32 mb/d by year end. How­ever, with the on­go­ing pro­duc­tion cut agree­ment, it is re­port­edly said that Libya will have to cap its pro­duc­tion at 1.25 mb/d, as de­cided in the re­cent meet­ing be­tween oil pro­duc­ers.

Fur­ther­more, Nige­ria has vol­un­tar­ily pledged to curb the out­put at 1.8 mb/d with its cur­rent pro­duc­tion at 1.75 mb/d, ac­cord­ing to Bloomberg. On the other hand, the po­lit­i­cal sit­u­a­tion in Venezuela could dis­rupt oil pro­duc­tion in the coun­try that has been de­clin­ing over the past few years, ac­cord­ing to some re­ports, while the in­creas­ing pos­si­bil­ity of US sanc­tions on the coun­try could fur­ther af­fect its abil­ity to re­pay its debt. This cou­pled with re­as­sur­ance of com­pli­ance from Iraq, UAE and Kaza­khstan could help curb oil sup­ply in the near term.

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