Oil prices saw a good rebound last week after slumping sharply in the week prior as short positions got covered in the run up to the meeting later this month. The Opec monthly report was a mixed bag as it reported another drop in its monthly production while upgrading Non-Opec supply forecasts.
The latest in the oil market is that Saudi and Russia have agreed to extend the output cuts until March 2018. This is likely to propel prices further up in the near term before we get official confirmation in the Opec meeting.
Overall, in the recent weeks, frustration about the slow pace of market re-balancing led to liquidation of long positions. The growing concern is that rising Non-Opec output, led by the US is increasingly offsetting the reduced Opec production. Official Opec data suggested that Opec cut oil output in April by more than pledged. Supply from the 11 Opec members with production targets fell to 29.76 million bpd, lower than the target of 29.80 mbpd.
Including Nigeria and Libya, the two members exempt from cuts, output by all 13 Opec members in April fell to 31.73 million bpd, down 18,000 bpd from March.
The bearish part in the Opec report however, was the fact that Non-Opec supply forecasts continue to be revised upwards. Opec kept its demand forecast also unchanged at 1.27 mbpd. The Opec now sees Non-Opec supply growth of 0.95 mbpd in 2017 vs. previous forecast of 0.58 mbpd. The revisions have been largely prompted due the fast rebounding shale oil production in the US. Oil rig count has been increasing since June 2016 and is now at its highest since April 2015. US oil rigs are up by 394 since the low in May 2016. Weekly data from EIA shows that total US oil production is comfortably above 9.3 million bpd.
EIA forecasts show that US shale oil production is expected to rise further in May. The EIA drilling productivity report showed that shale oil output will likely increase by 123,000 bpd in May to 5.19 mbpd, biggest jump in two years. Other Non-Opec production is also receiving a boost at higher prices. Brazil’s oil exports have jumped 65 per cent y/y in Jan-Feb to record highs of more than 1.46 million bpd. Brazil’s production is projected to rise further by 0.2 mbpd in 2017. Broadly, rising Non-Opec output will compel the Opec to extend its cuts and will still act as a big headwind to prices this year.
Yet, WTI prices have rebounded sharply after falling below $44 as the selloff seemed overdone in light of the impending Opec meeting later this month.
Clearly, the task ahead of Opec is difficult given that it will have to maintain the output cuts in face of the rebounding Non-Opec production. When Opec meets again on May 25, the big question will be about the extension of deal, whether by another 6 months or a year. Latest reports suggest that they may extend it until March 2018 under the same conditions. If that happens, we could see a more credible floor to prices and a rally could extend back towards $55. If they fail to extend the deal, we believe oil prices could see a fresh round of selling.
Meanwhile, US inventories declined by 5.2 million barrels last week, one of the biggest drawdowns of this year. US oil inventories have increased 43.5 million barrels so far this year and have started to fall now in the summer months. There are signs that global inventories have also started to fall off from recent highs. Globally, oil in floating storage fell to 58.4 million barrels in March from 82.6 million barrels at the end of 2016. Latest data suggest that oil inventories in floating storage have declined by more than 30 per cent since the start of the year. This will provide floor to prices if the visible inventories start to decline.
On the whole, we believe that prices could extend their rebound this week in light of the latest statement from Saudi and Russia. The IEA report this week will provide further confirmation about market fundamentals. On the upside, $53-55 could be tested but will remain a strong cap for WTI. On the downside $47 should hold given current fundamentals.