Oil inventories in OECD countries continue sliding chiefly on the back of the OPEC deal
OPEC sticks to its output limits, further extension of the agreement on the cards
New forecasts indicate a return of oil glut
Outlook for US shale producers looks promising but production upside questionable
Demand in the US and oil inventories are among the key drivers of oil prices in the short-term
Oil and ramifications of US hurricanes
Oil prices in the United States have rebounded quite considerably of late regardless of a negative impact from the hurricanes. Analysts from Goldman Sachs predicted that an implied increase of oil inventories in the US could achieve as much as 0.6 mbpd mainly on the back of a dramatic drop in terms of the US refineries’ capacity. Nevertheless, in spite of the fact that oil output declined significantly due to adverse weather conditions and US imports of crude was vastly curbed by a lack of vessels the worst might be already behind us. On the other hand, the US is slowly entering the less supportive period of time when a seasonal increase of demand for fuel is expected to be subsiding. There is an upbeat factor which makes the current outlook a bit rosier – gasoline stocks remain relatively low.
US oil production is getting back to normal levels but it could be 200 kbpd lower compared to weekly estimates. Crude imports is bouncing back as well, however it still hovers fairly low. On top of that, lower demand for oil from refineries turned out to be sufficient to cause an increase in US crude stocks three weeks in a row. Source: Bloomberg, XTB
Declines of US gasoline stocks are in line with the trend which is confirmed by the annual path (a lower part of the chart above). However, seasonal patterns could foretell a bounce until the end of the year which could curb potential increases of oil prices, at least in a short run. Source: Bloomberg, XTB
To sum up, the current situation on the oil market in the US seems to be getting back to normal as conditions stabilize after the hurricanes. On the other hand, US shale producers could take advantage of that situation and hedge their output at around $50 per barrel. If so, it could result in a noticeable pick-up in the US output. However, that scenario appears to be unlikely at this stage, we analyze that theme at the end of this article.
OPEC, the production cuts deal and fresh forecasts for 2018
The Cartel has boasted about compliance of the deal exceeding 100%. However, the devil is in the details, when we compare OPEC’s estimates with those coming from the secondary sources it turns out that a difference in Saudi Arabia oil output equals as much as 70 kbpd. Thus, one could say that the Cartel could manipulate the data a bit.
Looking at the chart below one could conclude that the overall level of compliance may be satisfying, though. Admittedly, there is no full compliance but we can be close that level when seasonal oil production cuts in Russia and Mexico are included. That scenario still acts in favor of declining global oil stockpiles.
Bloomberg calculations based on the IEA data indicate that compliance of the deal was at 94% in August which is a much better level compared to the prior months. It stems predominantly from the fact that Saudi Arabia resumed cutting its output while Iraq increased its own compliance at the same time. Furthermore, the latter country reported that it exceeded 100% of declared production cuts in September which could buoy further oil prices. Source: Bloomberg
Saudi Arabia, Russia, Mexico, Azerbaijan and Venezuela are among those countries which adhere the most to the declared production cuts. Seasonal factors played the important role in curbing oil out-turn, though there were some internal clashes in Venezuela as well. What’s more, a further reduction of crude output in the South American country is likely which could offset an adverse impact from cheating countries such as Iraq, UEA and Angola. Source: Bloomberg
Even as we take account of higher oil output in Libya and Nigeria the overall oil backdrop looks quite well. Thus, if both countries decided to joint the agreement it could be a turning point for the global oil market. However, will it be enough?
There is just a tiny surplus of oil produced in OPEC in comparison to the declared cuts. Even though bulls could have some reasons to be joyous, it might be not enough to take oil price much higher. Source: OPEC, XTB
The latest OPEC’s forecasts could herald the oil market re-balancing could speed up. A recent increase of oil prices was a result of speculations about a possible extension of the deal as well as the new projections pointing to a higher demand in the following year. All of that coincides with a lower projected rise of OPEC’s supply. Having said that, it could be still not sufficient to buttress oil prices durably, however further global economic expansion could result in a yet higher increase of demand for oil.
The latest OPEC’s report showed a revision of global oil demand by 0.35 mbpd for the next year. As far as this year, the forecast was raised by 0.28 mbpd. It looks encouragingly given that oil prices hover around relatively high prices and OPEC remains on its course to curb supply. Source: OPEC
According to the latest OPEC’s estimates there will be lower oil supply from non-OPEC countries. That said, the main issue is the first quarter where an increase of production is forecast. That scenario is also confirmed by other institutions. Source: OPEC
Moving on, OECD oil inventories are declining which points to the further market re-balancing. Since the turn of the year there has been a drop of stocks by more than 100 million barrels compared to the 5Y average. Nevertheless, when we take into account a global level of oil inventories in turns out that the outlook doesn’t look so well.
Moreover, an implied level of oil inventories marked a reduction in the second quarter of 2017. However, it’s too early to draw more far-reaching conclusions as the remainder of 2017 and the next year still pose a risk.
On the flip side, the updated IEA forecast are not encouraging. Taking account of the currency supply and demand forecasts and weighing them against an assumption that OPEC’s output will be maintained broadly unchanged, the first quarter of 2018 could see a massive glut of crude oversupply (as much as 1 mbpd). That said, if the Cartel wants to see acceleration in terms of the market re-balancing, a rise in demand could be needed. On the other hand, OPEC could implement deeper cuts, which we think is unlikely though.
On top of that, OPEC could offer more clarity via publishing more details when it comes to oil shipments. In addition, there is a possibility that the Cartel could curb its exports of crude which could play into the hands of oil bulls. As we can see at the chart below, Saudi Arabia lowered its own exports of crude quite markedly. Therefore, OPEC seems to be equipped with two tools (cutting production or/and exports) which could result in a rise of prices.
Is is the end of the US shale?
Over the course of recent months there were some speculations saying that the US shale oil output could have been profitable in some parts of the country even as the price of crude was at $35 per barrel while the whole shale industry could have brought profits when the price of crude stood at $50. However, according to Bloomberg calculations the break-even price could be much higher when capital expenditures (CAPEX) are included. That issue concerns especially the Permian basin where the largest amount of CAPEX took place over the past months. We can also perceive the Permian features itself the greatest decline of oil extraction’s efficiency per a rig.
Higher staff costs and a shortage of fracking specialists are among the reasons why marginal costs of oil extraction are rising. There are presumptions that the US shale output will not be profitable until the price of crude is at around $55. If so, it could result in a retreat of the trend of declining oil rigs.
WTI oil prices hover slightly above $50 per barrel and that level seems to be a strong support for buyers. What’s more, the price is moving within an upward channel which could be respected given the current fundamental outlook. What could be a turning point? Firstly, a lack of a further extension of the ongoing deal between OPEC and non-OPEC countries. Secondly, a marked increase in terms of US inventories. That said, once there are deeper cuts of oil output or/and the US shale industry experiences some disruptions, it could give a rise to an extended leg higher towards $55.
It looks like the price could keep on rising when a potential corrective move is completed, however a decline below $49 appears to be unlikely. Moreover, the latest rebound when it comes to volume might suggest that bulls are taking control, it’s not an unequivocal signal though. Source: xStation5
In turn, as far as Brent prices are concerned, buyers could eye $60 as their potential aim which is underpinned by a 78.6% retracement of the latest big swing lower. On the other hand, a 61.8% retracement could be viewed as a support. Before the price manages to go much higher, it has to break a cluster of local peaks marked at the turn of the year.