It's the shipping, stupid: why Opec's output cuts are not working

Jun 15, 2017, 01:32
It's the shipping, stupid: why Opec's output cuts are not working

USA crude stocks fell last week as refineries hiked output, while gasoline stocks increased and distillate inventories rose, the Energy Information Administration said on Wednesday.

Late last month, OPEC said it would extend an 1.8 million-barrel-a-day cut to oil output by nine months, though March 2018, after the November deal failed to fully clear a global oversupply in oil, which has been keeping prices relatively low.

"Our first outlook for 2018 makes sobering reading for those producers looking to restrain supply", said the report.

USA crude futures fell by 1% to trade at $45.97 a barrel after the report was released.

Sign up now and get breaking news alerts delivered to your inbox. This upward adjustment was mainly due to the downward revision in non-OPEC supply as world oil demand remained unchanged. Traders will be watching figures on last week's USA stockpiles to be released later on Tuesday by industry group the American Petroleum Institute. Some non-OPEC countries, such as Russia, Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Sudan, and South Sudan promised to cut output by 600,000 barrels per day, beginning from January 1, 2017. Crude oil futures have lost 15 percent of their value since February, raising the risk that unhedged companies are more exposed to market weakness.

Oil inventories across the world's most industrial nations rose in April by 18.6 million barrels to 3.045 billion barrels, thanks to higher refinery output and imports.

Exports in May, when the kingdom's total production was 9.880 million bpd, averaged below 7 million bpd, three industry and shipping sources told Reuters.

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In its monthly assessment of the market, the agency said global crude inventories were 292m barrels higher than the five-year average.

This is partly because Saudi Arabia usually burns more crude in power stations at home in the summer months to meet extra demand for power as people rely on air conditioners to deal with temperatures that can reach 50 degrees Celsius.

The report came after market close, and had more than wiped out the modest gains made in Tuesday's session on the back of analyst expectations of a draw in stocks. Importantly, the IEA expected the increase in non-OPEC supply next year to be higher than the growth in overall global demand.

July West Texas Intermediate crude fell $1.55, or 3.3%, to $44.91 a barrel on the New York Mercantile Exchange.

The IEA forecast an increase in non-OPEC output of 1.5 million barrels per day to 59.7 million bpd in 2018, with U.S. output to reach more than 14.1 million bpd.

United States crude production this year is expected to rise by 430,000 b/d, with production ending 2017 around 920,000 b/d higher than at year-end 2016.

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