Cracks show in OPEC's plan to curb oil supplies

Tomas Mccoy
July 14, 2017

As oil price weakens, so does high yield, and vice versa, but as Warren Estey, head of America's natural resources at Deutsche Bank sustained, increased volatility means less room for errors when markets become more efficient, even if the eventual profits can be sky high.

Prices drifted lower during Thursday's Asian session with buyers unable to make any impression.

When OPEC's technical committee meets in St. Petersburg at the end of July to evaluate compliance with the production cut deal, the big question will be what to do about Libya and Nigeria. According to the latest estimates, compliance declined to 78% for June from 95% in May. The two countries have managed to increase their combined production by more than 700,000 bbl/d in recent months, the IEA said.

OPEC said on Wednesday its oil production jumped in June and forecast world demand for its crude would decline next year as rivals pump more, pointing to a market surplus in 2018 despite the OPEC-led output cut. There are some evidences that Russian Federation is also against any further extension of the deal because such an extension will only make oil markets more volatile after it expires, when everyone returns to their normal output rates.

Last month, global oil supply rose by 720,000 bpd to 97.46 million bpd as producers opened the taps.

Nevertheless, the IEA believes strong demand growth - forecast at 1.4 million bpd in both 2017 and 2018 - may still help reduce bloated inventories in the second half of this year. It reported that U.S. crude oil inventories fell 7.5 MMbbls (million barrels) to 495.3 MMbbls between June 30, 2017, and July 7, 2017.

PublicInvest said the estimation was made based on its analysis of WTI and Brent's futures trades.

Supply issues will tend to remain the dominant short-term focus with more positive rhetoric from OPEC needed to revive confidence, although choppy trading conditions are liable to continue. The additional supply from the an already over-saturated oil market has often been blamed for plummeting prices.

Saudi Arabia produced 10.05 million barrels a day in June, the first time this year that its production has surpassed 10 million barrels a day. It seems that Russian Federation may oppose any attempts to deepen the oil production cuts as it may give the impression that OPEC and its partners in the deal are uncertain about its effectiveness in reducing global supplies.

Even as the Energy Information Administration (EIA) reported that USA oil production had risen, most of that gain was from Alaska and the Gulf of Mexico.

If Libya and Nigeria demonstrate sustained production over the next several months, then it is likely that in November OPEC will pressure the countries to cut production by 4.5%, the same rate as other members.

On the impact of the slow production on Nigeria's budget, Mr. Kachikwu said with projected 2.2 million barrels and benchmark price of price of $42.50 per barrel approved in the budget, the country lost about four months due to delay in the approval of the budget.

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