From Nick Cunningham: The oil market is in a “wait-and-see mode” as OPEC implements its production cuts, with the record level of compliance boding well for tighter conditions, the IEA said in its latest Oil Market Report.
The Paris-based energy agency said that OPEC’s 90 percent compliance rate was a record high for the group, which took collective production down to 32.1 million barrels per day (mb/d). And while it is still early and the data is still murky, “OPEC nevertheless appears to have made a solid start to what is a six-month process. This first cut is certainly one of the deepest in the history of OPEC output cut initiatives,” the IEA said. Saudi Arabia, Qatar and Angola appeared to have cut more than they promised.
The additional cuts of 558,000 bpd promised from a litany of non-OPEC countries is a little less clear – the IEA projects that Russia has slashed output by 100,000 bpd in January. Russia promised to cut 300,000 bpd over the course of the six-month compliance period. Data from other countries is unclear although the IEA said that Oman appears to have reduced output by 45,000 bpd.
In short, OPEC is on the right track. And that is a good sign that the oil market is adjusting towards some semblance of balance. There are a lot of unknowns, but the IEA says that if OPEC can continue with its high compliance rate, global oil inventories could decline by around 0.6 mb/d on average between January and June.
The danger is that oil supplies outside of OPEC (and within OPEC, for that matter) increase in the month ahead, offsetting the progress made by the OPEC deal. The IEA sees production rising in Canada, Brazil and the U.S., three countries that could add 750,000 bpd in 2017. Take that 750,000 bpd and add in an additional 160,000 bpd from Libya that has come online since November, an additional 110,000 bpd from Iran, and smaller increases from Nigeria. All together, the additional capacity could go a long way to offsetting the OPEC cuts.
On the bright side, the IEA noted that global demand continues to look strong – the agency revised up its demand forecast for 2017 for the third month in a row, with stronger-than-expected demand in Europe, China and India. The IEA now sees 2017 demand growth at 1.4 mb/d, up 0.1 mb/d from its last report in January.
As such, despite rising output from the U.S., global oil inventories could continue to decline. In fact, OECD inventories have declined for five consecutive months, bringing them back towards the upper end of their five-year range. By mid-year, the IEA still sees inventories above average, but down from the stratospheric levels seen in 2016.
It is difficult to digest all of these metrics to get a clear picture of where the oil markets are heading. OPEC output is falling, but non-OPEC output – led by the U.S., Brazil and Canada – is rising. Global oil inventories are falling, but are still exceptionally high. And in any case, they have been rising for nearly two months in the U.S. Oil prices have firmed up, but have stagnated in the mid-$50s, hitting resistance any time they try to rise towards $60.
Adding to the confusion is the cacophony of voices on either side of the debate. While the IEA expects robust demand this year, others are not so sure. “I think oil is in a very dangerous zone now precisely because demand is not there,” Boris Schlossberg, BK Asset Management’s managing director of foreign exchange strategy, told CNBC last week. “The irony of this whole thing is that OPEC cuts are holding, but the demand is not there. And the longer oil wallows at this $52 level, the more likely it’s actually going to go to the downside. And if it trips to $50 a barrel stops, I think it could really tumble very quickly. So I think we’re in a perilous territory,” he added.
Others are more bullish. “If we continue to see a decent compliance level in the 85 to 95 percent range from OPEC and we do see inventories cleaning up in the U.S. we may get another leg up,” Dominick Chirichella, senior partner at Energy Management Institute, told CNBC. Goldman Sachs added its voice to the bullish side of the ledger, with “the rest of the world already showing signs of tightness” even though U.S. oil inventories remain elevated. The investment bank sees the oil market dipping into a supply deficit in the first half of this year.
The IEA probably summed it up best with its concluding remarks in its Oil Market Report, stating that the oil market is in a “wait-and-see mode.”
The United States Oil Fund LP ETF (NYSE:USO) fell $0.03 (-0.26%) in premarket trading Monday. Year-to-date, USO has declined -1.88%, versus a 3.57% rise in the benchmark S&P 500 index during the same period.
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