Despite two months of OPEC production cuts, US crude inventories keep rising. EIA weekly data released on Wednesday showed US crude stocks rose for the ninth straight week by 8.2 million barrels to 528 million barrels.
US production is also responding to higher prices over the last several weeks. According to EIA data, US production increased to 9.08 mbd and is soon to be climbing higher. EIA revised upward its 2017 forecast for US crude production to 9.2 mbd as well as its 2018 forecast to a record 9.7 mbd. The 2017 forecast already looks to be surpassed.
Similarly US oil rigs increased by seven last week according to Baker Hughes oil rig data released last Friday. Since OPEC starting implementing its production cut agreement in January, the US energy industry has added 80 new oil rigs.
Total rigs in the US now stand at 609, the most since October 2015 and up from 392 rigs one year ago.
The cause of the “US rig-covery” appears to be OPEC’s practice of talking up oil prices last year, and of course, the group’s production cut deal last December which boosted prices even higher
The quick pace of US producers prompted Saudi energy minister Khalid al-Falih to deliver some straight talk in his speech at the annual CERA Week Conference in Houston on Tuesday.
“We will not bear the burden of free riders,” Minister al-Falih said. “Saudi Arabia will not allow itself to be used by others.”
Saudi Arabia has enacted deeper cuts in January and February to compensate for weaker compliance among other OPEC members and non-OPEC participants.
Of particular concern is Iraq and Russia which have the lowest compliance of all producers who signed up for the cuts. The Russian minister said in Houston this week that his country intends to “fully comply” with its 300,000 b/d cut under the agreement. For that to happen, Russia would have to sharply increase its cut from about 115,000 b/d in February to 500,000 b/d in March to catch up. Of course, this is very unlikely.
As a result, Minister al-Falih continued to defer a commitment to automatically renew the six month cut agreement in June. He said OPEC would use OECD inventories as the metric for success with a goal to see the stocks lower into the 5-year average range.
The prospect that the agreement will not renewed in June has caught many observers by surprise. When Minister al-Falih first raised the possibility in February that renewal may not be necessary, we said the message was intended for two audiences: 1) to encourage compliance among other OPEC and non-OPEC participants in the deal; and 2) US shale producers to inject some uncertainty about continued price support.
Minister al-Falih delivered that second message personally this week in Houston.
