VIENNA, AUSTRIA --- While the US East Coast is battling a Nor’Easter storm with blizzard conditions today, oil prices are bracing for another storm on Wednesday in the form of EIA’s weekly crude inventory data.
Last week US crude stocks rose for the 9th straight week by 8.2 million barrels a day (b/d) to 528 million barrels. Another EIA announcement of an increase in crude stocks on Wednesday would almost certainly send oil prices further downward.
On Monday, EIA released its monthly drilling activity report that forecasts April 2017 US shale production will increase by 109,000 b/d to 4.96 million b/d. The Permian Basin alone is forecast to increase by 79,000 b/d to 2.29 million b/d, according to EIA. If this trend continues, US shale production would add another one million b/d in 2017.
According to Baker-Hughes rig count data, US producers added another 8 oil rigs last week for a total of 617 working oil rigs – up from 386 rigs a year ago. Since OPEC’s production cuts went into effect in January, US producers have added 88 new oil rigs.
If you thought all of this bearish data for oil prices was worrying OPEC, you would be wrong. Instead OPEC remains positive and calm about its production cut agreement working as intended to bring the market into balance and stabilize prices.
I’m in Vienna, Austria where I spent several hours Monday with OPEC Secretary-General Mohammed Barkindo and other top officials exchanging views on US and global energy policies and markets. Before I left for Europe, I was also able to meet with officials from other OPEC producers who were passing through Washington having just attended the CERA Week conference in Houston. The following are some relevant points and candid observations coming out of my discussions.
OPEC Plan is Working: OPEC maintains that it is in the optimistic camp when it comes to oil prices and market rebalancing. Saudis also share confidence that the production cut agreement is working and caution against pessimism less than three months into the deal. However, Saudis also acknowledged that better compliance is needed especially from Iraq and Russia.
Russia Compliance: Many analysts believed the market got spooked by the Russian energy minister’s lack of clarity at his CERA Week presentation regarding its own compliance and an extension of the production cut agreement. The Saudis do not share this view and cited Russia’s previous announcements that it would slowly ramp up cuts over the six months. Regardless of your view, there was a hastily arranged press conference in Houston last week with Barkindo and the Saudi and Russian energy ministers to re-emphasize full compliance with the agreement.
Extension of OPEC Cut Agreement: Everyone seems to have their talking points down on this one with all saying that there has been no decision yet about extending the agreement in June for another six months. OPEC’s compliance monitoring committee meets next week in Kuwait and will begin to discuss the extension. However, we were told not to expect any final decision until OPEC’s regular meeting on May 25 in Vienna. While the extension decision is being deferred, there has been thinking underway about the upcoming meeting and some additional conditions regarding an extension. First, it was conveyed that non-OPEC participants in production cut deal will be invited to participate in the the May 25 OPEC meeting in some way. There could also be changes to exempted countries in any extension. The Saudis raised the specter that Iran may need to participate if the cuts are to be extended. In addition, because of the Nigeria's successful increase in production, there is the potential that its exemption under the production cut agreement may be lifted if cuts are extended for another six months.
US Shale Producers: OPEC met with US shale producers in Houston during the sidelines of the CERA Week conference and felt they began a very useful dialogue. They believe US producers got the message about being careful not to overproduce and upset price stability. The Saudis acknowledged the surprising return of US shale production but expressed confidence that strong demand growth in the future will translate into little impact on prices. The US shale production increase was compared to the Russian production increase from 6 to 10 million b/d which had little price impact due to strong world demand. Saudis realize US shale is very responsive to price but still do not believe it comes on and off like "flipping a switch." Instead they see a "dimmer switch" that slowly adjusts.
Increases in US Crude Stocks: Saudis urged caution about the market being misled about rising US crude stocks and rig counts. For Saudis and OPEC, the important metrics are OECD inventories and floating storage which are all declining. OECD inventory data is the metric OPEC will use to gauge success of the production cut deal, and OPEC expects stocks to decrease into the five-year average range. NOTE: First, this seems impossible without an extension of the production cut deal. Second, both EIA and IEA forecasts show OECD inventories will be well above the five-year average range even with full OPEC compliance.
