The Energy Information Administration today released monthly production data showing that November 2016 US production had increased to 10.038 million barrels a day (b/d) surpassing Saudi Arabia production in November of 9.97 million b/d. Click here for the EIA monthly production data.
US crude production in November is near an all-time record high of 10.40 million b/d in 1970.
In addition, EIA also released today its weekly crude inventory data showing a crude build of 7 million barrels last week while gasoline stocks and distillate fuel oil stocks declined by 2 million barrels and 1.9 million barrels respectively. Click here for the EIA weekly inventory data.
On January 21 we wrote a client note regarding Saudi Energy Minister al-Falih’s comments about continuing OPEC and non-OPEC production “cooperation beyond 2018” as “not surprising and especially now” with “monthly US crude production near or at 10 million b/d and on its way to surpass Saudi production in 2018.” Today’s EIA production data confirms we are well past this point.
As we approach the end of January, here are a few oil market risks and developments we are watching over the next few months:
US Production & OPEC
Now that we are past Trump's January decision to continue to waive sanctions on Iran oil exports, oil prices should start to retreat. In our view, there are a few fundamental signals that should tame the recent bullish trend.
- As demonstrated in today’s weekly inventory data, we should continue to see the supply surplus start to grow again due to expected lower demand in Q1 and part of Q2.
- The EIA crude inventory draws over the past several months should start to reverse and show builds again.
- US monthly crude production should continue its rise above 10 million b/d on its way to surpass Saudi production capacity and approaching Russian production levels in 2018.
- We expect to see this rising US production narrative dominate the discussion at least through 1H 2018 and weigh on prices.
- OPEC and non-OPEC compliance with the production cut agreement may also slip over the next few months.
- In our view there is a big question mark about whether the Russia will want to continue with the production cut agreement after June – despite recent comments by Russian Energy Minister Novak.
Saudi Arabia: “Whatever It Takes”
- Saudis are determined more than ever to support higher prices ahead of the Aramco IPO this year. We see them as an activist investor and backing up their pledge to do "whatever it takes" even if it means unilateral production cuts.
- At the December OPEC meeting, the Saudi minister said he didn't see US shale supply rising significantly in response to higher prices and thinks robust and growing demand will absorb the higher production. On the heels of today’s US monthly production data, this theory will be tested over the next few months.
- Recent news reports suggest the Aramco IPO may be moved to 2019 – mainly due to uncertainty on the listing decision. We do not believe the IPO will be delayed but will probe further on this topic in the weeks ahead.
- I will be in Riyadh in February to assess Saudi views on the IPO, market conditions and potential actions and will publish client notes with updates from the trip.
Next Iran Oil Sanctions Decision in May
- The next Trump decision on the Iran oil sanctions waiver is May 12, and in our view, Trump will not renew it.
- When Trump extended the waiver earlier this month, he said it was the "last time" unless Congress passes robust legislation and the EU reopens negotiations with Iran on the deal. The President seems to have raised the bar for action necessary to re-issue the waiver.
- We think both are highly unlikely to happen so the deal is very much on life support.
- US sanctions would affect about 1 million b/d of Iranian crude exports on global markets and provide a boost to oil prices when demand is already higher in the summer months.
